Forex Trading

• Dollar, Stocks And Risk Appetite Reaction To Fed’s Stress Test May Not Be Straightforward
• US 1Q GDP Sets A Disappointing Precedence For Global Growth
• Yields Continue To Contract With The RBNZ Cut Lowering The Ceiling On A Key FX Rate

The steady and relatively unimpeded rise in risk appetite over these past few months may have finally been put off its pace. After a bout of high volatility that coincided with heavy event risk, the markets seem to have lost their clear bias with momentum receding and the fundamental outlook for global growth and financial markets growing more complicated. This time around, traders and investors may require a tangible source of support to bolster their exposure while the future of risk and reward are still unbalanced. Taking measure of the market’s health though, there are a few irrefutable improvements in general conditions. The key improvement comes through the DailyFX Volatility Index. Though this indicator ticked higher week-over-week; at 13.7 percent, the forecasted range of price action over the next three months is nonetheless just off its lowest levels since the September (just before the panic that led to the panic sell off in equities and a deleveraging for so many other asset classes). This is a trend that cannot be ignored as its consistency reflects an underlying improvement in a critical component of the risk/reward equilibrium. For the potential yield or return side of that same equation, the forecast is not as bright – yet. Benchmark interest rates among some of the highest yielding currencies continue to fall and will do so until there is a genuine economic recovery underway. In the meantime, the global rates will trend closer and closer to zero and subsequently close the gap (or carry) along the way. However, we have seen in this market, things can change on a dime.

How risk appetite (or aversion) develops is becoming more and more a factor of sentiment rather than a natural response to fundamentals. The effects of recession are familiar to nearly every market participant; but policy officials, economists and speculators are quickly coming to a consensus that the global economy is beginning to stabilize and is likely to recover sometime at the end of this year or into the beginning of 2010. At the same time, the slighter than expected improvement in the pace of the United States’ recession through the first quarter certainly pushed this outlook back somewhat. As further growth readings from the industrialized and emerging markets cross the wires, the outlook will find further adjustments. Expansion and economic activity are inherently a platform for returns. As such, the timing of the eventual recovery will play a significant role in how quickly the rebound for speculation will be. Should the correction happen immediately, there will still be substantial yield differentials to work with and spur investment. However, with each month that passes, income producers like the Australian and New Zealand dollar will see their rates steadily depreciate. And, while there demand for return is on the rise, we cannot completely write off risk. After months of stability in the capital and credit markets, we are coming on the next major threat to calm: the Fed Stress Test. Initial reports suggest six of the 19 banks under review will come up short and be forced to raise capital. How will the market react to this? Is another collapse inevitable? Time will tell.

Written by John Kicklighter, Currency Strategist
Article Source - Dollar, Stocks And Risk Appetite Reaction To Fed's Stress Test May Not Be Straightforward