Forex Trading

There have been prominent recoveries for risk-laden securities across all most of the markets over the past week. Rallies in equities, bonds, commodities and key currencies have afforded us the first clear signal that the worst for investor sentiment may have already passed.

• Risk Appetite Seems to Be on The Rebound, But Will It Last?
• Without a Global Rescue Effort, Financial and Economic Instability Will Spread
• Are the Yen, Dollar And Franc Still Considered Safe Haven Currencies?

There have been prominent recoveries for risk-laden securities across all most of the markets over the past week. Rallies in equities, bonds, commodities and key currencies have afforded us the first clear signal that the worst for investor sentiment may have already passed. However, the bigger themes in fundamentals and trends in price action may keep skeptical and weary traders out of the market until indisputable confirmation can be justify a return to risk appetite. Looking at the markets this past week, anxious bulls have enough to go on. The Dow is 12.5 percent off its multi-year lows, crude is back above $50 per barrel and the high-yielding Australian dollar has rallied against most of its major counterparts. A recovery in so many markets is hard to ignore; but just as all asset classes succumbed to panic and fear back in October, it is just as likely that the these securities recuperate together. Of course, it can be a genuine, long-term recovery or a short-term relief in a much more pervasive decline. ‘Bear market rallies’ are common sites even in the midst of history’s worst market collapses. It is important to keep the sight of the bigger picture. Equities, commodities and the carry trade index are all still engaged in their worst trends in many decades. All it would take at this stage is a minor catalyst to foil the tentative recovery; and there are plenty of these fundamental dangers looming.

The deflation in investor confidence over the past year and a half been extensive and profound. In fact, it has come to the point on more than one occasion that appetite for yield (a permanent element of investing) was completely abandoned for any bastion of security and liquidity. Inevitably, this need for safety of funds will pass; and the balance of risk / reward will once again level out – encouraging traders to take a measured level of risk for the hope of making returns above and beyond what mere government interest rates can provide. However, fundamentals could defer this fated happy ending for quite some time. First and foremost, the global economy is still embroiled in its worst recession since WWII. More importantly, we have yet to see evidence that the slump in economic activity is easing – so a bottom may very well be a long-way off. When economic conditions do bottom out, there is still the issue of yield. Global interest rates (the foundation for all rates of return) are quickly approaching zero. The reinvestment of capital into speculative assets will be slow and cautious as leverage will initially be difficult to come by and the bulk of the crowd will wait until market leaders can produce a definitive recovery. Over the next two weeks, focus will fall on the effectiveness of the Western government’s efforts to stabilize their own economies. So all attempts to turn growth around have failed; and there is a growing consensus that only a global rescue plan can cure the world’s ails. The best hope for coordinating such a politically-charged endeavor will be the G-20 meeting on April 2nd.

Written by John Kicklighter, Currency Strategist
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