Trader Risk Appetite In The Currency Markets Comes Back Into Focus

The focus today should be on the currency markets and their effects on trader appetite for risk. The rally in the equity and commodity markets has been driven by a weaker U.S. Dollar and increased aversion to risk. Overnight, however, the S&P Corp. triggered a sharp decline in European equity markets following the release of a report stating its concerns about the increasing debt burden in the U.K. In its report Standard & Poor’s built a case for U.K. debt reaching 100% of GDP growth and even warned that the AAA rating of government bonds could be reduced. This report triggered a widespread reaction in global equity and currency markets. Traders today should pay close attention to the moves in the currency markets as a sell-off in the majors could lead to increase risk aversion and may trigger the start of a substantial break in equity markets.

Investor sentiment turned bearish overnight following the release of a report by the S&P Corp. stating that they have turned negative on the U.K. economy. This negativity spread to the June Euro as some traders feel that the Euro Zone economy may face exposure to prolonged weakness in the U.K. economy.

Overnight, the Euro tried to break out to the upside, but could not attract any fresh buyers. This indicates that the market may be overbought. Speculation has been driving this market higher but reality may actually bring it down if investors start to pay attention to the poor economic numbers from the Euro Zone.

Weaker equity markets overnight and better Treasury results could be indicating that investor aversion to risk may pick up today to drive the June Euro lower.

Early this morning the S&P Corp. announced a negative view of the U.K. economy. The news threatened its AAA credit rating as the rating company cited the huge amount of U.K. debt as a major problem. Standard and Poor’s is forecasting the possibility that U.K. debt will eventually equal 100% of GDP.

The June British Pound fell sharply from the six-month high at 1.5814 following the release of the news and has not recovered. At the same time additional selling pressure has not surfaced so the market has been trading in a range since the initial decline.

Although the uptrend is still intact, this negative news is having an effect on global equity markets which is leading to increased aversion to risk. If sentiment shifts substantially following the opening then expectations are for this market to feel downside pressure all day.

The negative news affecting the British Pound is spreading to other currency markets including the June Canadian Dollar. Traders are sitting up and taking notice that perhaps the global economy is not as strong as speculators have been led to believe.

The key indicator today will be the equity markets. Stock prices have been rising on increased appetite for risk. This morning’s news however is triggering a negative reaction in the global equity markets. If stock prices cannot recover from this “shot heard ‘round the world” then look for the June Canadian Dollar to feel downside pressure throughout the day.

Falling commodity prices led by a good sized drop in crude oil could put additional pressure on the Canadian Dollar. Depending on how aggressive the bears get this morning, much of this week’s gains could be wiped out this week.

While no important price objectives were reached that would attract sellers, today’s bad news from the U.K. and decreased demand for riskier assets is helping to form a daily closing price reversal top which is a strong indication that the selling is greater than the buying at current levels.

June Japanese Yen traders seem a little confused as to which direction to take this morning. Falling global equity markets triggered by negative news out of the U.K. should encourage Japanese Yen traders to repatriate their currency for protection. This should lead to upside pressure. Additionally extended weakness in the equity markets could lead to a reversal in the carry trade which should underpin the Japanese Yen.

At times overnight it seemed the Yen was trading flat because the recent rally has been overextended. Some traders feel that Japanese investors have been anticipating a break in the equity markets and have been buying back Yen for more than a week. Furthermore, the verbal intervention threat by the Bank of Japan from earlier in the week may also be limiting upside movement.

The main trend is up in the June Swiss Franc but the rally has become labored since this currency reached a Fibonacci retracement level at .9086. The failure to breakout strongly to the upside following the penetration of this level as well as the swing top at .9113 indicates that prices may be too expensive at current levels.

Negative news from the U.K. overnight is leading traders to sell higher risk assets. This may change investor sentiment more toward safety. If global markets feel downside pressure this morning then look for traders to sell the Swiss Franc and return to the safety of the U.S. Dollar.

DISCLAIMER: Futures and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. In no event should the content of this correspondence be construed as an express or implied promise, guarantee or implication by or from Brewer Futures Group, LLC, Brewer Investment Group, LLC, or their subsidiaries and affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of options and/or futures positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

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