Macro risk analysis - Daily Form for April 29, 2011

Inter-market Technical Analysis using algorithmic pattern detection

FRIDAY APRIL 29, 2011       08:46:00 GMT

Yesterday’s North American session produced some strong whipsaw behavior in many commodities - including silver and crude - as well as some edginess in the usual array of favored risk on assets. The end of the session last night brought most of these back into relatively calm equilibrium but one way of interpreting the erratic behavior is that markets are becoming somewhat over-stretched in their willingness to seek out momentum amongst the high beta assets. There is also a risk that many players are so short the US dollar that any sign of life in the world’s reserve currency (at least for now!) sends shivers across the quant fund community.

The metaphor of a lop sided market being like an ocean liner where all the passengers are moving to one side of the ship, and that this can cause a danger of the vessel capsizing, strikes me as rather apt for the extremes in correlation and strong appetite for risk at present.

The DAX index closed yesterday’s session exactly at the 20 day Bollinger Band ( with a 2.5 standard deviation), and since the German market has made such a dramatic recovery since the sell-off occasioned by the Japanese tragedy in mid March, I would suggest that the risks of a correction are now increasing.

Bloomberg is reporting this morning the following in reference to the Chinese yuan, or more precisely the renminbi:

China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.

The yuan strengthened 0.17 percent to 6.4907 per dollar as of 2:50 p.m. in Shanghai, earlier touching a 17-year high of 6.4898, according to the China Foreign Exchange Trade System. It’s set for a 0.9 percent monthly advance, the best performance of 2011. In Hong Kong’s offshore market, the currency jumped 0.29 percent today to 6.4635, the biggest gain in Bloomberg data going back to Aug. 24.

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

CYB, an exchange traded fund, provides a convenient method for taking a position on the possibility of further strengthening of the yuan.

Just to clarify something which I said in yesterday’s column regarding AUD/USD.

While the Aussie currency is showing extraordinary momentum to the upside it has not been able to break above $1.10 so far and as the 240 minute chart reveals the $1.0950 which I cited as a stop loss level has not been violated. The target for an opportunistic short trade in today’s session should be more precisely $1.0775 and not the 1.07 figure mentioned here yesterday. I did amend the commentary for some other web outlets which carry the Daily Form commentary but wanted to set the record straight for today’s session. I would not carry the trade beyond tonight’s close.

The Hang Seng Index closed the week at the 23,700 level and as suggested on the chart there is relatively strong support provided by the 50 day EMA and lower Bollinger band just below this level at approximately 23,400.