Interesting action in currency markets this morning: Following Friday’s rout, generally worse news out of China, and elsewhere, and general (and logical) expectations for the global equity selloff continuing into the start of this week, the most telling currency pairs are signaling relative calm as U.S. equity futures markets open a little later today. 

Now, keep in mind, short-term volatility is what it is (unpredictable), does not make for long-term trends (although over time it certainly offers signals), and of course the day is still very young.

I suspect that, for the moment, news that the Chinese central bank is set to inject a virtual record level of liquidity as markets open has traders re-thinking their plans to short futures this afternoon, and equities come tomorrow morning. Assuming, that is, that, as usual, they take their cue from currency traders — and assuming that the pairs continue to trade as they have this morning.


Key currency pairs to watch are USD/JPY (US dollar/Japanese yen), the dollar typically declines against the yen when uncertainty is high, AUD/USD (Australian dollar/US dollar), the aussie tends to fall against the U.S. dollar on high uncertainty, and AUD/JPY — the most telling — aussie falls against the yen when times are troubling.


Click each insert below to enlarge: White line = currency pair, yellow = S&P 500 Index. Green rectangle in lower right represents this morning’s move:


USD/JPY



AUD/USD



AUD/JPY





Present (subject to change of course) sanguineness of currencies notwithstanding, Chinese equity futures (white line) are set to open roughly 8% below where Chinese equities traded in the cash session when their markets were closed on January 23rd. Presumably, it could be worse:

Bottom line: Look for the coming week to be unusually volatile, in either direction (or both).