Thursday Morning Update

The Nikkei 225 had another rough night of trade as the main Japanese index went over by 6% as Investors and traders alike lose faith in the great experiment going on in Japan. The Yen has been strengthening for the past couple of weeks  and could strengthen more as it has technically broken through a lot of strong support levels and trendlines that have provided a base for its weakening throughout 2013.
The Breach of 95 in USDJPY major leaves a test of 90 very likely as the Market has stopped believing in the Japanese bet to beat deflation and to stimulate economic growth. The "Long Japan" trade (Long Nikkei, Short Yen) is being unwound quickly by Hedgefunds and this has put Global Equity and Bond Markets into Turmoil as market participants have started to questioning the effectiveness of Quantitative Easing programs around the Globe. This is a serious Red Flag warning as is the Break Down in the American Dollar, which normally gains during times of Risk off and Uncertainty in the Financial Markets. The Dollar has been breaking down heavy in the Past 2 weeks as talk of Tapering echoes around the Markets on a daily basis. Stock Market correlations have broken down as the Bond Market and the Equity markets sell off together which is a very worrying sight. Bond Yields in the States have risen to 2.25% on the 10 Year. The end of the QE program in the states should effectively strengthen the Dollar as it is reducing The Federal Reserves Balance sheet as there is less Dollars being printed and pumped into the Economy. The reason why the Dollar is in fact weakening is because the Fed is supporting the Bond Yields by buying so many each month and with the inevitable tapering of Bond purchases on the Horizon traders are positioning themselves for bond yields to increase dramatically as the Fed takes off its Economic Stabilizers.
Looking at the Euro currency, 2 weeks ago we talked about the EURUSD technically and how the Market was net short but not going down and with the lack of bad news coming out of the Eurozone and Draghi's more hawkish tone at the last ECB press conference it has caused an epic short squeeze in the pair and could see some further upside to 1.35 near term as there is still shorts to be squeezed out. Saying this however, We still believe there is a lot of Political and Economic uncertainty in the single currency and with the Dollar approaching key support at an oversold level it may not be long before we start heading south again in the pair. If this is just a Dollar correction it has set up a lot of great levels for traders to enter positions at. A short of the EURUSD pair at 1.35 with a stop loss at 1.3750 could be a very attractive swing trade with a target of 1.25 or below, as would a short of Cable at 1.57 as it approaches its 200 Day MA at 1.5710.  We also believe that the Japanese Government may come out all guns blazing at their next meeting and adopt an even more aggressive easing program. With the USDJPY pair sitting at the 94 handle as I type it could set up a huge trade with Analysts still calling for 110 to 120 by Year end. These are certainly some very interesting swing trades that are starting to set up nicely but it is not time to fade the moves quite yet. The Volatility in the Nikkei and the JGB market must ease before entering a position as the Liquidity in the Market has dried up in the last few weeks and the Moves are overdone and your position could be stopped out very quickly.
Good Luck in the Markets