Gut Check Time

Markets came unhinged in one of the wildest days in years. We're entering a period of exceptional volatility in markets and it's a reminder to manage risk because major moves will continue to hit. We examine what today's price action says about what's next. All 4 EURUSD & USDCAD Premium longs hit their final targets, while the USDCHF trades were stopped out, leaving NZDJPY and AUDUSD in progress.

The short version of what happened in markets Wednesday was that US retail sales were soft, with the control group at -0.2% compared to +0.4% expected. The Empire Fed added to the sentiment a 6.1 compared to 20.5 expected.

Sentiment was hanging by a thread after two weeks of elevated volatility and these reports sparked a full-on flight to safety. Traders rushed into bonds with 10-year yields falling as low as 1.86% after a break of 2.20%. Stocks went into a near-panic with the S&P 500 down by more than 50 points at the lows and turning negative for the year.

The story in FX is that Fed rate hike expectations have fallen to a 14% chance of a hike by July from 53% a month ago. That weighed heavily on the US dollar right across the board.

Notably, interest rate differentials trumped the demand for safety in FX. In general, a currency like NZD would lag on a day like Wednesday but it was the leader on higher rates. In addition, a solid milk auction underpinned the kiwi.

Looking ahead, every headline is a major headline in this environment. Sentiment will change by the minute and that makes preparation and defining risk/targets critical elements in trading. We urge our readers to remain confident but stay prudent.

In the near-term, the economic calendar is quiet but one event to watch is Australian consumer inflation expectations at 0000 GMT. The implied pricing for an Australian rate cut has risen to 50% for July 2015 and continued troubles would push that higher and sooner.