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Risk Continues to Climb but I'm Growing Skeptical

Risk Continues to Climb but I'm Growing Skeptical

2011-10-06 19:36:00
John Kicklighter, Chief Currency Strategist
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We have seen a hearty rebound in risk trends these past few weeks and it has certainly spilled over to the FX market. However, looking at the backdrop for fundamentals and the lack of volume that is supporting this move; I'm skeptical of how far this will run. I'm not saying it can't continue, rather the risk of an immediate return the dominant trend is exceptionally high.

As it stands, I'm actually long risk to some degree. A long EURCHF and short GBPCAD bearing naturally theoretically follows the risk lines (the Euro is the more fundamentally troubled currency against its direct safe haven alternative in the Franc; while the Canadian dollar is treated more often as an investment currency). That said, both pairs avoid the standard reaction to risk trends as the pound is itself a fundamentally troubled currency and thereby can use positive sentiment; while the EURCHF has a man-made floor beneath it at 1.20 that curbs speculators' interests.

Given my tiered entry and my position size, my EURCHF exposure is doing well; but the rise of the European financial crisis is unsettling. While this pair may not be able to dip below 1.20; it can certainly drop back to the threshold. I am considering booking soon. In the meantime, my GBPCAD short (having already hit its first target) came very close - 15pips- to hitting my ultimate objective at 1.5890 before pulling back. I've trailed my stop to 1.6165 to further secure accrued profit.

As for my short-term scalp in USDJPY, I was knocked out overnight in the pullback at breakeven (having trailed the stop up). Looking back, I should have exited when the pair struggled to overtake 77. Being proactive is important when watching the market with a scalp.

Looking forward, I'm very interested in the potential of EURUSD. It has struggled to overtake 1.3400; but it looks like it will make the break. Technically, this could be a signal for a trend turn; but follow through is heavily dependent on a very disturbing outlook for the Euro-area's crumbling financial health. Another reversal possiblity is GBPUSD which has stalled once again at 1.53 and has generated a very large lower wick; while the rate speculation has now passed. I'm more interested in this pair as a reversal option than EURUSD. Perhaps this can be a good 'spread' setup.

In the meantime, I'm also keeping a close eye on NZDUSD and AUDUSD. While I didn't jump on that channel floor reversal for the kiwi, it has played out very well so far. That said, I'm very skeptical of risk trends; and am therefore keeping a close eye on a revival of a dominant bear trend (and then, a 0.7450 break for NZDUSD). AUDUSD could be an interesting hold and reversal around 0.9950 depending on how things develop in that area.

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