Risk Appetite Won’t Go Down Easily, Watching EURUSD Closely

We ended last week off with a critical risk-event. The S&P 500 put in for its first meaningful channel break (or as I see it a return to sanity) since the very beginning of December. At the same time, EURUSD would spell out its own exhaustion retracment following a three-week run that was heavily influenced by a false sense of security in Europe's financial position. There are two meaningful trends here; but they come back to a common root - recognition of underlying troubles. In the short-term it is easy to ignore genuine troubles if there is profit to be made. However, we will always come back to reality, sooner or later.

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That said, conviction is critical. We had a necessary correction in the overblown optimism that has defined the capital markets for many weeks now; but we still need to see the speculative crowd unwind from this optimistic view and capitulate on their overleveraged positions. We are still waiting for this confirmation. But in the meantime, the natural correction of Friday's volatility has knocked out my EURCAD setup and pushed the EURUSD short into the red (the separate crude short on the channel break was demolished by unique developments in the energy market - namely trouble in Egypt and the spread between WTI and Brent closing). As for the EURUSD short, sticking with the original 1.3775 in the initial layout is prudent. Ideally, we would see this pair slide alongside a dip in equities through the upcoming Asian and European sessions to confirm we are not going to see a jump-started (and implicitely short-lived as well as volatile) revival in risk appetite to start Frebruary.

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Another carry over setup is the long-term, low leverage USDJPY. This will certainly be stirred by any aggressive risk appetite moves as the market tries to work out whether they need liquidity or unwind carry more. Nevertheless, the forecast is long-term; so short-term fluctuations are to be tolerated. New is a low-risk GBPUSD short setup. Long-term fundamentals do not support the sterling; but the market's can ignore that for a time. Instead, I'm looking at the surge through Monday as being excessive, the position of resistance around 1.6025/00 and the potential of risk trends as keys to this setup.

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Running through the potentials list, there are some very good and immediate setups. AUDUSD is at the top. We have been waiting for that parity / 0.98 breakout for some time; and the upcoming RBA decision can act as the catalyst for that. USDCAD threatened to complete its inverse heads-and-shoulders pattern by breaking the 1.0025 neckline; but we need confirmation and conviction. I still do not like USDCAD's trading conditions in general. EURCHF is another H&S pattern with a neckline at 1.2775 - ironic as we just recently broke an inverse version not long ago. Then there is also EURAUD which is forming up a very tension prone H&S. If it plays out that short-term pattern it can reverse aggressively given the preceeding runup; but it would also counter a long-term trend break we seemed to post not long ago.