[achiever]

• Risk appetite still polarized and cross correlations stubbornly high so we look at the ‘source’, the S&P500, for clues for n/t sustainability

• The break of 1000 in S&P500 is an important landmark, but this could mark a short-term peak for risk, consolidation, then further risk building

• For G7 FX, this suggests the USD strengthens briefly, before being sold off again

• And for EM FX, existing longs should start to take profit, whilst fresh buyers should wait for better levels

Risk appetite has been polarized for some time. As a result, an increasing proportion of trades are seen as either ‘risk on’ or ‘risk off’, with nothing in between. Hence the USD remains heavily influenced by perceived risk sentiment – the headliner being S&P500 as one of the most visible proxies and in many ways considered ‘the source’.

S&P500 close above 1000 (not since Nov 4) is encouraging from a psychological standpoint. It has taken 9 months to get back to where we were and the next real challenge is staying above. Note from the chart below major resistance at 1014 (38% Fibo of 1576/666 downswing) that could prove critical. Similarly, the DXY index hit 7-month lows this week, matching and testing 77.68 low from Dec 18and is beginning to find stronger support here.

It is clear to most what has driven the latest risk rally – broad, solid US earnings; improved direction in US data. This is all good news for the global economy. But this is now priced in. Next week or so, investors need to scramble to find the next clue to justify staying long. This could be tough. NFP this Friday will probably need to beat -330k convincingly (this morning’s ADP number fell just short but improved sharply from previous month to be clear) to convey the impression the job recovery is accelerating.

The FT front page this morning also reported China’s GDP numbers are again under scrutiny after provincial releases didn’t quite add up to the national numbers. Not a new revelation of course, yet with much confidence riding on China growth (perceived at least), this could be an issue when one is looking for an excuse to take off risk. Also this morning, the Baltic Indices also showed rates falling 3.4%, now down some 25% from June levels (that’s June this year). This seems more consistent with a choppy, sluggish recovery in global trade and should be the next question investors ask themselves.

From a trading standpoint, we suspect the USD will recover briefly as some risk is taken off. UK received good data today but GBP, EUR, AUD all now look overbought and due a pullback before retesting highs. Note ECB and BoE decisions tomorrow though neither are likely to adopt a more hawkish tone just yet. Longer term we still view the USD on a multi-month bear trend.