Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Risk Aversion Returns as Stock Markets Fail at Resistance

Currencies / Forex Trading Apr 15, 2009 - 04:59 PM GMT

By: Ashraf_Laidi

Currencies Best Financial Markets Analysis ArticleGlobal risk aversion gradually returns as equity indices struggle in passing the earnings test. Our oft-mentioned 860-865 target in the S&P500 denoting the +30% rally mark from the March low was tested without success, further highlighting the significance of the implications for the latest equity rally. Although the S&P500 breached above the 50 and 100-day moving averages, these moving averages stand halfway between the 200-day MA (989) and the March low (666).


The wide disparity between the 100 and 200 day MAs in US indices highlights the speed of the recent advances as they managed to breach above medium term trend measures (50 and 100-day MAs) but still remain far below the longer trend measure (200-day MA) which remains dwarfed by the longer-term trend.

While the relationship between equities and currencies evolved since the ongoing retreat in volatility 4 weeks ago, the principal rule of behind risk and lower yielding currencies continues to hold. The upper chart shows the relationship between the S&P500 and selected currency pairs with notably positive correlation. AUDUSD and USDCAD (expressed in inverted terms on chart as CADUSD) have shown the highest correlation with the S&P500 since March (recovery in stocks) at 0.78 and -0.77 respectively--but for different reasons.

Aussies correlation with equities had been more robust during a rising market, while the loonies correlation with equities had been slightly higher during a falling market. NZD continues to attract strong selling interest against USD and JPY during falling equities due to lingering negativism and expectations of at least 50-bps in RBNZ rate cuts. The Canadian dollar has largely benefited from a rebound in oil prices and steady oil prices, but the looming threat of quantitative easing from the Bank of Canada as well as the lagging effect of US macro-deterioration on Canada raises doubts about the credibility of the loonie's advances.

The lower chart graphs the relationship between GBPUSD, EURUSD, FTSE-100 and S&P500. Since Jan 1st, GBPUSD showed overall weak daily positive correlation with the S&P500 and FTSE-100 at 0.33 and 0.28 respectively. The correlation remained weak even during the years worst 4-week period (Feb 9th- Mar 9th). In contrast, EURUSD, proved more positively correlated with S&P500 and FTSE-100 at 0.67 and 0.35 during a falling market (Feb-Mar) and a rising market (Mar 9th Apr 9th) at 0.38 and 0.20. The analysis highlights sterlings recent advances relative to EUR especially amid the lack of negative UK news and Barclays successful sale of I-Shares, which implies no needed government protection for the bank. In general, EUR and GBP remain best correlated with stocks when traded against JPY (despite similarly low rates with USD) than against USD.



Despite sterling's stellar performance (highest overall return month-to-date in a universe of 11 major currencies), the rally shows increased signs of tapering off. The absence of real economic data from the UK has often proved a temporary booster for the currency over the past 2 years. Despite its newly acquired low yielding status, sterling continues to behave as a risk currency, rallying during improved market sentiment. The vacuum of news on the UK banking front has also been a factor. But as the IMF sets to officially release its latest estimates for global banking losses next week--reportedly standing as much as $4 trillion from the already reported $1.3 trillion since the start of the crisisa renewed pullback in financials will likely drag sterling anew. Recall that the IMF was widely ridiculed a year ago when it announced its initial estimates for banking losses to reach $1.0 trillion.

Chapter 5 of my book devotes 25 pages on the topic of "Risk Appetite in the Markets" with illustrative case studies in FX, VIX, equities and coporate bond spreads.

JPY crosses may have staged a gradual recovery after touching our projected targets on Tuesday courtesy of US retail sales and negative earnings from Intel. But just as S&P500 struggled in crossing above the 29% threshold from the 666 lows beyond 860-870, USDJPY remains unable to breach above 101.60 resistance, an increasingly prominent signal of traders reluctance to sell the Japanese currency beyond a point thats deemed excessive as far as FX risk appetite.

The level marks the 61.8% retracement of the decline from the August high of 110.7 to the to the January low of 87.13. Interim resistance stands at 100.60. The duration of carry trades remain selective, with the more prolonged gains (and short-lived losses) seen in Aussie due to a limited scope for RBA rate cuts relative to G10 central banks (quantitative easing included). Not only Aussie rates are expected to near their bottom, but they could do so at a relatively hefty 3.25%, which is higher than all G10 currencies. Aussies recent 6-month high of 0.7320 drew near the 200-day MA of 0.7350, a long term benchmark not breached since August. The Aussie story is now well cemented into the psyche of institutional and retail investors, especially given its limited pullbacks during risk aversion (reduced appetite).

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules