FX Trading – Are stocks telling us it’s time to get short?

The pace of growth in the euro zone's services and manufacturing sectors slowed much more than expected this month, but surveys published on Thursday showed businesses were more optimistic. Markit said its flash purchasing managers' index (PMI) data for September pointed to strong economic growth of 0.6 percent in the third quarter, but down from the 1.0 percent pace in April-June that surprised markets when reported last month. The Eurozone Flash Services PMI, compiled from surveys of around 2,000 businesses ranging from banks to restaurants, fell to 53.6 in September from 55.9 in August, its lowest reading since February. (Reuters)

And you guessed it ... the euro is taking heat because of the disappointing news. It was due for a rest. We continue to wonder if most of the latest surge was nothing more than sentiment driven on dollar/Fed fear from what we already knew, but was played up very loudly by the financial press -- possible Quantitative Easing 2. This currency game, as we keep repeating, is extremely perverse and relative, i.e. because those in the US are focused on all of our ills so closely, we tend to overlook the ills of others.

Spreads between Ireland and Germany at record highs today, on more concerns about Ireland’s banking problems ... the euro taking a breather on this and poor PMI news ... worth a trade?

EURUSD 2-hour chart: Bit of a rocket ride up of late. Is a breather due? Old high was 1.3330 which now represents key near-term chart support (last 1.3332); you notice we had a 1.3426 extension target on the chart ... which the euro achieved (frankly surprising us):

In effect, given the economics in the industrialized world, it seems most all paper currencies are extremely ugly now, save maybe the Asian-block and maybe some of the commodity currencies. But even on the commodity currency front, many look very extended -- one-way bets if you will -- and could be considered one-trick ponies in their own right. We say that because all things commodities seem now predicated on China. Not a bad bet so far, but still an increasingly risky bet given the political tensions between China and many other countries and at this stage in the credit cycle.

We noticed this little piece of news we hadn’t noticed being touted from the Financial Times today: Big Investors Pull Back on Commodities

• Investors withdrew $3 billion from the commodities markets last month
• Big investors (institutional) withdrew $5 billion from the commodities markets last month; thus small investors ended up adding $2 billion
• “This marks an important turning point in investment flows since institutional investment had constituted the most stable source of inflows, the bank [Barclay’s Capital] said.

And last night, we got GDP news from New Zealand which disappointed, tilting expectations of traders away from a pending interest rate hike from the country’s central bank. The New Zealand dollar is sharply lower on that news.

NZDUSD 2-hour: Near-term trend broken…

Everyone’s favorite currency -- Australian dollar -- is also lower today. This was a one-way bet in the making, we surmised early in the week. Unfortunately, we missed it. Just maybe a bit of correction is in store asit does appear to be a decent risk/reward setup near-term if, and that is the big if, we get some risk-off time on growing tensions with China (as we noted yesterday might be the dollar’s near-term saving grace; see dollar index back above key level in the second chart below):

AUDUSD 2-hour: The 0.9400 level would be a nice support area for a minor correction.

US dollar index blew through key chart support yesterday, back above today ... at least for now.

US$ Index Daily:

Another nagging question: given all the hoopla the last two days about QE and Fed pumping more money into the economy, why haven’t stocks reacted better? S&P 500 Index futures are bidding down 7.90. Could it be a “fool me once ...” with QE that didn’t help the real economy, so we aren’t going to be fooled again with more money pumping? If so, we may get back to risk off for a multi-day affair.

S&P 500 Index 2-hour:

Another reason we are ... watching EURUSD and AUDUSD for potential near-term trade opportunities.