Forex Trading

The market’s barometers of risk are showing steady improvement, just like many key instruments; however, the burden of uncertainty and threats of financial shocks are just greater now than they were a few weeks and months ago. Market participants are now left to discern whether the rebound in relatively high yield/ high risk assets is genuine or a relief rally as the eye of the storm passes.

• Trader Sentiment And Risk Appetite Hinge On Next Weeks G 20 Meeting
• Will Global Policy Makers Agree On A Coordinated Effort And New Reserve Currency?
• Is Protectionism The Next Threat To Market Sentiment?

The market’s barometers of risk are showing steady improvement, just like many key instruments; however, the burden of uncertainty and threats of financial shocks are just greater now than they were a few weeks and months ago. Market participants are now left to discern whether the rebound in relatively high yield/ high risk assets is genuine or a relief rally as the eye of the storm passes. Taking measure, we can see that most of the favored gauges for market sentiment are producing impressive improvements. Each day the equity market climbs, news headlines splash impressive statistics of its performance. For example, now at a four-week high, the S&P 500 is working on its best monthly performance in 35 years. Elsewhere, credit default swaps have dropped to their lowest levels in five years while the TED spread (the difference between the rate on the three-month US government notes and equal tenor Libor) has held close to its multi-year lows. It is the currency market however that provides the most interesting readings as reflects the seeming rebound in risk while also showing the changes that have developed between a calm in current market conditions and those from just a few years ago. The Carry Trade Index is in its most consistent rally since Spring of 2008 while the DailyFX Volatility Index extends its drop from December highs. On the other hand, it is no longer clear which currencies are safe havens and which promise outsized returns. If the outlook for health of the global financial system and economy were clear, this would not be an issue.

Indicators are frequently misinterpreted; and sometimes lose their relevance in certain market conditions. Considering the fundamental uncertainty that persists across the world, it is prudent to remain skeptical of the immediate recovery of investment confidence that will precede an influx of capital back into the speculative markets. This past week, policy officials increased their efforts to prevent what is now a severe recession from turning into a depression. Definitions for this state are loose, but its essential components are a sustained downturn in growth; high volatility in exchange rates; bankruptcies; severe restrictions on credit; and stunted trade. All of these circumstances have been met to this point; and a few of them are set to deteriorate further. At this point, the health of the global economy and the flow of money is a problem that must be addressed by every nation. However, only a few major players have made the effort with introducing massive stimulus plans, funds meant to draw out toxic debt, guarantee sound investments and bolster liquidity. This is the contention that leaders from the US and UK will bring with them to the G-20 summit on April 2nd. If there is no tangible and coordinated plan to come out of these meeting of nations, this rebound in optimism may very well collapse. With growth expected to slow further in the first half of 2009, protectionist threats rising and options running short; the future is fragile.

Written by John Kicklighter, Currency Strategist
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