Tuesday Morning Update

Good Morning,
                        Market nervousness about Fed tapering was perfectly illustrated late last night after a late article entitles "Fed likely to signal tapering move is close" from an FT Journalist and Fed watcher, sent US Markets into a sharp tailspin just before the close and Put some immediate strength into the USD. Once Markets had determined it was simply an opinion piece and there was nothing new in it they managed to recover enough to still close higher, but the entire sorry episode signifies how reliant on central bank stimulus markets have become. We hear an awful lot about how stocks are so cheap yet the mere prospect of slowing down the stimulus measures is enough to send markets into a tailspin. They can't be that cheap then, that investors are able to feel comfortable buying them, unless there is a Fed comfort blanket backstopping them?
With the Dry up in Volume in the Financial Markets in the past couple of trading weeks we have seen a break down in the Trend that we had observed all year and a break down in the correlation between different instruments. This could be for a number of reasons but the most likely is that the Market is at a turning point and the fundamental driver is the "Tapering talk" from the Federal Reserve. We personally do not buy into this. There is two things you can rely on in this world and that is night to turn to day and for Bernanke to be dovish. So the strategy for trading the FOMC minutes tomorrow has to be to buy Gold and sell the Dollar against a foreign currency.
We believe that the Dollar has reached an oversold level and it is setting up a number of attractive trades such as a short EURUSD position and a short Cable position. However with the Dollar likely to fall again tomorrow it is best not to enter this these positions until later in the week. EURO CFTC positions last week showed that the market is not as short as it was 3 weeks ago and this more balanced positioning will allow the Euro decline quicker on any Euro negative news or Dollar positive news. All the shorts have nearly been squeezed out as we approach 1.34 in this pair and with Analysts at Soc Gen and Bank of America calling for a decline to 1.20 before year end it could be time to adopt another speculative short position. Remember Soc Gen called a Euro short at the End of February before we saw it drop from 1.37 to 1.27 and they could be on the money again here.
Good luck in the Markets