“Risk on-risk off” is the default paradigm under which to analyse market moves and has been since the crisis. However, it is the strength of this paradigm which leads to such peculiar market behaviour with respect to the USD. If the fiscal cliff occurs, we expect this will lead to a generic risk-off move. For equities and bonds the default risk-off behaviour makes sense. However, buying the USD on such news is a contradictory reaction. One option is to wait for the dollar buying to abate and then go against the market. Alternatively one could side step the dollar entirely. Here one would trade the cross rates and sell risk-on currencies and buy the risk-off ones.
*Bank of Japan preview – The BoJ meet on 30 October and an announcement some time between 4am and 6am London time is expected. We believe the market’s expectations of something “Big” happening are over-stated. Various attempts by the Japanese authorities to weaken the yen over the last 20 years have had little or no success.
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