Forex Trading

• Market Sentiment and Carry Interest Will Have To Find Its Bearings Soon
• US and New Zealand Credit Ratings Shirk Dour Forecasts
• A Round of Rate Decisions and Growth Reports Gauge Risk/Reward

Risk appetite across the markets has maintained the bullish trajectory cultivated since the beginning of March; but momentum has clearly drained over the past few weeks. The hesitation develops as market participants debate the merits of forecasting a genuine market recovery on the basis of what is so far early signs of a moderating recession and the promise such tentative progress holds for bolstering yields. This wavering is a sign that skepticism is on the rise with traders having already spent much of the fuel a speculative rebound could afford the market after a lengthy period of caution and deleveraging. However, looking at the Carry Trade Index, it is clear that this congestion will come to a breaking point soon. Looking beyond the congestion of the past month, there is still a steady bullish bias behind risk appetite since February. The same can be seen in the benchmarks for the various markets: the S&P 500 has advanced eight out of the past 10 weeks; the benchmark 10-year Treasury note is off nearly 9 percent from its record highs set in December; and AUDJPY has climbed 12 of the past 16 weeks to a current perch of 33.5 percent off its recent record lows. Clearly, the momentum of these past few months would support a continued rise in sentiment. However, putting this advance into perspective, the Carry index is still more than 26 percent off its 2006 highs and equities are more than 40 percent from their respective record highs.

When will the struggle between speculation and fundamentals balance out; and what will happen when the market shifts back to this equilibrium? As the market’s appetite for risk rises, we have to consider what can fuel the advance through the coming days, weeks and months on to a genuine recovery – if this is indeed a genuine recovery. Here we see objective fundamentals are still sketchy in their support for a rise in optimism. Taking the basic ‘risk-versus-reward’ analysis approach, there is reason to be concerned over further financial troubles later down the line and certainly grounds to doubt a rise in returns beyond what volatile speculative gains can achieve. Separating capital returns and yield income is essential. Capital gains can be driven by normal market forces like a rebound from oversold conditions and temporary momentum to sustain a rally as investors return to the market. This could essentially be the foundation for the progress we have seen the markets make over the past three to four months. However, to turn a reversal into a recovery, there needs to be the hope of higher yield income to attractive deeper pools of money to the more established carry trade interests. Next week’s RBA, ECB, BoE and BoC rate decisions will help on this front. Should they all hold as expected and note improvements seen in the distance, we will be one step closer to a return to carry. In the meantime, safety is still the greater unknown. While the US and New Zealand debt ratings were recently secured, we still have not seen a clear turn in global recession readings.

Written by John Kicklighter, Currency Strategist
Article Source - Market Sentiment and Carry Interest Will Have To Find Its Bearings Soon