FOREX TRADING

A Big Risk Rebound – More To Come?

A big rebound in risk after the market started the week on back foot after a chaotic triple witching for US equities on Friday and a weak opening this week on the passage of the historic US health care bill. Today’s rally basically erased the risk aversion brought on by these developments and brought the market back approximately to its Thursday closing levels. EURUSD likewise recovered from a bout of weakness below 1.3500 after the Greek Deputy Prime Minister lashed out with aggressive language against the Euro and especially Germany, which he said was enjoying the destabilization brought on by Greece and profiting from the weak Euro and whose banks are speculating in Greek debt.

A Bloomberg article discusses the PBOC ‘s Zhou’s suggestion that US and China may engage in bilateral talks to address the pressing yuan issue since the political ‘noise’ isn’t helping the situation. Consensus is firming for some kind of revaluation of the yuan in coming months. It will most likely be the slow revaluation model that it employed consistently in 2005-08 and to the tune of about 5% per year, unless China experiences some kind of trouble. Others believe the odds for a step revaluation initially are high, including Goldman Sachs’ economicst Jim O’Neill. The kneejerk response to any move toward revaluation will likely be risk negative because it is an effective tightening on growth, and this market is enjoying a speculative bubble brought on by low interest rates and won’t like the news.. Now that the Obama administration is over its massive campaign to get healthcare passed, it can spend more political attention and time to the yuan issue. Any steps the Chinese take are likely to be cautious ones, so this may prove less of a market mover than many anticipate would be the case.

Chart: EURUSD

Today’s rejection of the sell-off looks like a bullish hammer formation, though the magnitude of the reversal is modest and only came after a fairly steep sell-off from above 1.3800.

Chart: AUDUSD

We have a bullish formation after a day like today on the daily charts, but the shorter term charts help to reveal the damage done by the latest sell-off. If AUDUSD dips again toward the 0.9100 level, it will create an interesting head and shoulders pattern. Key resistance for this immediate move higher is coming up in the 0.618/0.764 Fibonacci retracement levels between 0.9185 and 0.9210. As always, eyes will be on risk appetite for direction for the pair. AUD is looking extremely overvalued in the longer term picture, but it’s challenging to find a trigger for any sell-off as long as risk indicators are all swimming more or less higher. There is no data out of note from Australia this week, though the RBA’s Lowe is out speaking at a conference on Thursday and RBA Governor Stevens is set to speak to a conference on Friday. The most interesting unknown for the Aussie besides the direction of risk appetite is whether, when and to what extent China will move to revalue its currency.

Chart: Gold

The most interesting non-FX chart at the moment is Gold, where the renewed sell-off has completed the neckline of a head and shoulders formation, a break below which would be considered technically bearish. It is interesting to see Gold performing relatively poorly while risk appetite has been on the rise. Nor has gold benefited from renewed EuroZone worries or all of the talk of the risk of sovereign default. With gold breaking down below 1100, where does the next support come in for the precious metal? And should this chart have any negative implications for AUD.

Looking ahead

Tomorrow’s UK CPI/RPI numbers are likely to tell us whether today’s rally attempt from sterling will have any follow-through, or whether today is a one off EURGBP down day on negative Euro sentiment. The SNB’s Hildebrand will also be very important to watch now that EURCHF has traded so persistently negatively of late.

Saxobank

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