The first two and a half weeks of the new year saw persistent selling of equities, commodities, and emerging markets. In the foreign exchange market, the dollar-bloc and sterling were crushed. The yen was the single biggest beneficiary, and speculators in the CME are net long the yen in the futures market for the first time since late 2012. 

It was as if many equity sellers returned from the year-end holidays, and got the jump start on the buyers. Some of the selling was passive as stops were triggered and money management considerations drove the liquidation. The buyers are most notable by their absence. However, the middle of last week, some buyers made a stand, and had reverberations throughout the capital markets. 

The rubber band was stretched far and snapped back violently. There was a dramatic role reversal. The Canadian dollar, for example, had lost 4.6% in the year through January 20.In the final two sessions of last week, the Canadian dollar was the strongest major currency, rallying 2.5%.The yen, which had been the strongest of the majors, gaining 2.8% through the middle of last week, gave back 1.25% in the last two sessions. 

The price action seems to have become unhinged from fundamentals, arguably as much on the rebound as it was on the decline. Consider sterling. It lost 3.7% through the middle of last week. Despite a fall in retail sales that was three times larger than the consensus expected, sterling rallied around 0.75% before the weekend, making it the second strongest currency on Friday behind the Canadian dollar. Given when seems to be an enhanced role for psychology and sentiment, the technical condition of the foreign exchange market may be more important than usual, and the break in the prevailing momentum makes it particularly timely. 

The euro has remained stuck in the $1.08-$1.10 trading range since the ECB cut rates and extends its asset purchase program in early December. There have been a few false breaks, and the euro closed the week a few ticks below the range. The technical indicators we use are not generating strong signals. With Draghi kicking the door open to March action, there may be some interest in trying to push the euro lower. However, the risk is for a dovish FOMC statement that recognizes the increased market volatility and the decline in market-based measures of inflation expectations (break-evens) to new lows. This means that a potential push lower in the euro at the start of next week could be reversed after the FOMC. The low from earlier this month is near $1.0710-15.