Is it Quarter-End Selling – Or Worse?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It was turnaround Tuesday in the financial markets as equities, currencies and treasury yields went on a free-fall in the last 2 hours of trade. The had been up more than 240 points intraday before giving up all of its gains to end the NY session down over 300 points. The losses were even greater on a percentage basis for the , which fell 3% and , which fell 1.7%. We can attribute the move to a number of different factors but the abruptness of the selling indicates that it is driven by liquidation. No news should be good news and currencies should not have fallen as much as they did on Tuesday.

Here in the U.S., it’s the end of the month and the end of quarter and in Japan, it is their fiscal year end so there can be a lot of position adjustments. Bad news for the tech sector and softer U.S. economic reports also contributed to the move. Consumer confidence eased for the first time this year according to the Conference Board’s and in the Richmond region, which was expected to accelerate also slowed in March. Looking ahead, is eyeing another move below 105 and we think that could happen. revisions are scheduled for release on Wednesday along with and while stronger data could boost the , these reports are not significant enough to alter market sentiment, which is this week’s primary driver of market flows.

The Australian dollar took the brunt of the selling, losing nearly 1% of its value against the and . No data was released Monday night and nothing was expected Tuesday evening but the currency was pressured by risk aversion and lower commodity prices. China’s troubles also have the greatest impact on Australia so it’s no surprise to see the currency, which did not benefit from weakness, close in on its 3-month low versus the U.S. dollar.

The also retreated after Monday’s breakout and while it remains above the 20-day SMA, further risk aversion could take the pair down to .72 cents. New Zealand were scheduled for release Tuesday evening.

Of all the major currencies, the was the most resilient even though it was also not immune to risk aversion. The loonie was unfazed by the 1.4% drop in as gains in USD/CAD are capped below 1.29. Still, a meaningful move above that level would pave the way for a stronger rally toward 1.30.

Softer-than-expected Eurozone and cautious comments from ECB officials prevented from breaking above 1.25. On Tuesday morning, ECB member Liikanen said the ECB should be patient in removing stimulus while ECB member Nowotny said asset purchases should be reduced gradually. While everyone is talking about unwinding stimulus, the combination of weaker data and cautious rhetoric has investors looking elsewhere for opportunities. With that in mind, EUR/USD has pretty significant support at 1.2340.

, on the other hand, sold off aggressively at the start of the NY session, but recovered into the London close and consolidated for the rest of the day, shrugging off the volatility in U.S. equities. The timing of the breakdown and reversal suggests that the move was driven by nothing more than quarter- and month-end flows. So with that in mind, , which ended the day well off its highs, could see another leg lower.