Forex Trading

• Immediate Risk Appetite, Dollar, Stock Response To Fed Stress Test A Sign Of Optimism?
• Bank of England And European Central Bank Struggling To Keep Pace
• What Happens When Speculation Turns To Fundamentals For Support?

Investors and traders have waded through the most densely-packed week for event risk in months; and the initial report is that optimism has held up well despite a relatively dour mix. However, until fundamentals catch up to (and support) sentiment, the recovery will be built on unstable ground. The recent tempered pace of what is now a two-month recovery in risk appetite may be a sign that investors are slowly coming to this realization – though recent ‘better than expected’ data and performance gauges have kept the various asset classes from faltering under the weight of a weak backdrop. With headlines covering smaller than expected quarterly losses for major companies and signs of a slower contraction in the global economy, side-lined market participants have been encouraged to put their capital back to work in traditional securities. The benchmark Dow has pushed to near-four month highs in a 30 percent advance from its 12 year lows. The same sentiment is reflected in the currency market. A quick recovery in carry interest has brought the Index up to its highest level since the short-term rebound following the market crash back in October. As far as support goes, a measured recovery in investment levels and yield appetite is warranted through a steady reduction in risk and very early signs of a recovery in rates of return. Volatility in the deeply liquid currency market has pulled back to levels not seen since September and the interest rate outlook for the Australian dollar has just recently ticked higher. On the other hand, market sentiment is still recovering from a near panic state and returns on every other asset are contacting. So, is sentiment overshooting the actual recovery?

Whether the current recovery in optimism and investment levels continues into the medium term will become more and more a factor of fundamentals. A natural boost in the markets is natural as participants reinvest and early speculators trying to jump back in the market to make up for their crushing losses through 2008. However, such sentiment can prevail for only so long before investors are discouraged by the lack of a return over benchmarks and risk-free instruments – or are driven away by another unforeseen shock to the financial system. For this week, another leg of the recovery has been won through the relief provided by the results of the Federal Reserve’s Stress Test. Despite the government’s requirement for 10 of the United States’ largest banks to raise another $74.6 billion dollars and forecasts that 19 of its institutions could see a combined $600 billion in additional losses through 2010; investors were calmed by the fact that things weren’t worse. However, this data shows a fundamental issue. Further losses are inevitable. More importantly, global growth is fully expected to contract going forward. At the most fundamental level of finance, returns are borne from economic expansion and the lending and investing it generates. With both the BoE and ECB reporting their efforts to shore up the markets this past week and government funds still holding things together, it is clear that a recovery can’t yet support itself.

Written by John Kicklighter, Currency Strategist
Article Source - Immediate Risk Appetite, Dollar, Stock Response To Fed Stress Test A Sign Of Optimism?