Current `Risk Aversion` in perspective.

Current `Risk Aversion` in perspective.

By: James Ansher | Where To Trade | On:13-10-2014 15:48
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Key Highlights

  • Sentiment from Germany
  • Equities indices fall
  • Gold price is higher
  • Bond prices higher
  • USD bulls stalled

 

The current market sentiment has shifted from a bullish US dollar market to uncertainty about where the USD is heading. We think that terming the current market conditions as risk averse is exaggeration at worst and premature at best. It was all going well for the USD bulls until the German ZEW survey report was released. In a nutshell, sentiment in Germany is down, the ZEW had a drop to 6.9 from 8.6.Current market conditions in Germany indicator fell from 44.3 to 25.4 this is the lowers reading for two years.

Market Impact

 Several analysts are pointing at this as the spark of the apparent risk aversion in the market.  The S&P 500 is 3.1% down. This is the largest fall in two years. Equities across the globe are feeling the impact; the FSTE 100 is down 1.4%, and the Dow Jones is down 0.7%.

In the currencies market, the perceived ‘safe haven’ currencies are the biggest gainers as demand moves from perceived riskier to less risker areas. The YEN is trading higher as it gets a boost from its safe haven status. The Swiss Franc is also showing strength across the board. The USDCHF for instance is 150 pips down for Last week’s peak. Gold is now 500 pips above last week’s trough against the dollar. Globally, bonds are trading higher as the markets distribute he risk to safer asset classes. The US dollar rally has been effectively halted in the short term as the market looks for direction.

 

H1 Chart; GOLD has been trending Higher

 

Compounding factors

The current market conditions are seen to have been caused by three compounding factors. Put together they paint a very gloomy outlook for the global economy. The important questions for a trader are; how long will the resent situation last and are things really that bad?

The Situation in Europe has been bad for several quarters now, from forex traders point of view, we must take into account that the market had already priced in this poor sentiment. The question is whether things are worse than we had previously anticipated?

First we must consider that Britain is voicing concerns that that the European situation will affect the global recovery and also its own economic outlook. Over the weekend sentiment from the US also indicate that the Eurozone situation will affect the pace at which the FED normalizes its monetary policy.

This means that the bullish outlook we had on the dollar is now in review. We still anticipate the USD to strengthen in the long run but the fundamental news needed to trigger such moves may take a while to come.  All bets are off, there is the risk of a reversal and loss of some of the of the 12 week gains made by the dollar. Though this a remote possibility we must none the less take it into account. This is time to take profits from Long dollar trades and wait for other long entries.

 

Putting it all together

There are few certainties in the market right now. The USD remains fundamentally strong but we anticipate that there will be a pullback in the immediate medium term as data comes out from the US

Any poor data from the Eurozone also mean poor outlook for the dollar and all other economies that trade with Europe. If the uncertainty in Europe persists, we can expect the rate hike in the US to take a much longer than we had anticipated. We can also anticipate that the safe haven asset classes will appreciate.

Under such uncertain conditions the best trading approach is to take profits on the USD trades and reduce any unhedged exposure to the USD on either side until the bulls return. Gold, Silver and bonds should see some appreciation in the medium term. We should also maintain a long bias on the YEN.

James Ansher

James Ansher

When there is a will there is a trade

A successful Forex trader and expert advisor

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