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Time to Take Risk Versus Reward Seriously

Time to Take Risk Versus Reward Seriously

John Kicklighter, Chief Strategist

Often the risk-reward balance we consider is rather finely balanced - allowing us to pick trades with reasonable levels of risk to provide appetitizing returns. However, this balance is seriously skewed heading into Brexit week.

It will be difficult to escape the gravity of the EU Referendum. In its direct circle of influence, the UK and European Union / Eurozone are the most at-risk. An exit will lead to unclear trade/economic conditions in the UK but it is the Euro-area that carries the greatest risk as the implications of members leaving is far more unsettling beyond just an economic engine taken offline.

Both the Euro and Pound are therefore exceptionally risky, open to liquidity issues heading into the data and explosive reaction to the event. In turn the 'risk' implications for the broade rmarket readily connect to the Yen, the Dollar would be an idealized haven should volatility prove as extreme as what the markets are preparing for. Commodity currencies - AUD, NZD and CAD - are sensitive in moderate sentiment swells or greater.

This is not the time to put on or hold medium-term trends. Perhaps some pairs like AUDNZD or USDCAD can move far enough away from the blast that they may continue with medium-term views you have for separate fundamental and technical assessments, but nothing looks particularly remarkable at the moment.

Short-term trades are more reasonable given conditions, but this is tactical trading that requires constant vigilence. GBPUSD isn't the only pair showing sudden, intraday reversals.

The only trade I have going into next week is the USDJPY I've held short since the 116 breakdown - a head-and-shoulders neckline. Risk averison was my primary motivation for this position and it has yet to show with the kind of momentum I have expected. It may arise next week or next month or next quarter. However, I may book before Brexit to avoid the big and potentially detrimental moves that can arise. There are better positioned risk-oriented trades with more inflated premiums at this point.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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