How Strong Is The Inverse Usd/Equity LInk?

Global risk markets turned into the red in Tuesday trade, as investors remain unconvinced that the Euro-zone will be capable of overcoming the current debt problems, and that fiscal challenges may prevail throughout other major regions.

Forex sentiment had shrugged off weak Asian equity trade, with most pairs easily holding support against the Usd, but that all changed as European markets failed to hold equity trade higher.

Bearish Aud/Usd sentiment came from the RBA interest rate statement, that intimated no further rate hikes will come from Australia in the near-term, with Aud falling nearly 50 pips as the release hit. Aud/Usd extended the declines during the European trading hours, in reaction to negative equity trade that empowered the Usd, and now the pair is trading almost 100 pips lower from where it closed the U.S. session.

The initial wave of Aud weakness was transformed into overall Usd strength once the European markets decided that short-equity and short-oil trade was to be the order of the day, and that Usd-based Treasuries would dominate the buying of stocks. Most pairs have lost ground to the dollar, with momentum likely to slow ahead of the Wall Street session of trade.

The regional European markets saw strong downside action, with the most effected by overnight selling being the Spanish IBEX 35 index which was down by 3.10%, the Portuguese PSI 20 Index which fell 2.65%, the Greek AEX Index that was down 2.25%, and the Italian MIB Index, which lost 2.10%. The biggest equity-index losers just happen to be same countries that are at risk of a new debt crisis in the euro-area.

At the same time as the European cash markets were surrounded by a sea of red, S/P futures trade dropped through the 1195.00 area. On the 4-hour charts, S/P futures are trapped between the 1180.00 area which has been holding the market for almost a month now, and the 1195.00 major swing point area.

The price action of S/P futures will be strongly influenced over the next few sessions by these two price points. Usd bulls will feel some pressure around the 10:00 ET Pending Home Sales report, but judging from the price action seen lately, the market will continue with the trend that was developed earlier in the day, albeit at a much slower pace during Wall Street trade.