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Risk Appetite Returns to Market; But for How Long?

Risk Appetite Returns to Market; But for How Long?

2010-05-26 10:02:00
Joel Kruger, Technical Strategist
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 MORNING SLICES

 

 

FUNDYS
 
The buying back into risk was also seen in the equity markets, with US stocks staging a strong rebound into the close. However, the general feel at this point is that the latest rally, which carries over into Wednesday, will be unsustainable and the demand to sell currencies into rallies, in favor of safer haven USD and Yen investments, is still very much alive. 
 
Relative Performance Versus USD on Wednesday (As of 10:00GMT) – 

1) SWISSIE          +0.32% 
2) AUSSIE +0.19%
3) CAD          +0.09% 
4) STERLING +0.05%
5) KIWI +0.03%
6) YEN          +0.02%
7) EURO   -0.13%
 
Nevertheless, there has been a ray of light in European trade, with the OECD coming out with some ramped up global growth forecasts, while also calling for rate raised in both the UK and US by no later than Q4 2010. ECB Noyer has come out warning that intervention in the markets will be utilized in situations where “turbulence threatens the normal functioning of monetary policy, while Germany’s Merkel has said that Germany will do what it can for a strong Euro. 
 
Fed Chair Bernanke has been on the wires and has dampened risk appetite somewhat after saying that the Fed should not be providing US$ swaps as a permanent service for financial markets. Additionally, market participants remain focused on the EU and UK debt crisis, with the added strain of having to deal with a Chinese central bank that will most likely move to tighten in the near future. 
 
On the data front, the BOJ Minutes were released and showed a balanced view with regard to the downside and upside risks to the Japanese economy. Meanwhile, in Australia, Westpac-MI’s leading index of economic activity showed much better times ahead for the Australian economy. The data was better than expected, but was somewhat offset by a softer than anticipated value of construction release. German GfK consumer confidence was the main release in European trade and came in more or less in line with expectation. 
 
Looking ahead, US mortgage applications are due at 11:00GMT, followed by durable goods (1.3% expected) at 12:30GMT. Canada house prices are then out at 13:00GMT, followed by US new home sales (420k expected) at 14:00GMT. Oil inventory data caps things off at 14:30GMT.  US equity futures remain bid ahead of North American trade, while commodities are also tracking impressively higher. 
 
GRAPHIC REWIND
dxy5.26

TECHS
  
EUR/USD: Although the market has bounced quite significantly out from the recent 1.2145 2010/multi-year lows, into the 1.2600’s thus far, the overall trend remains intensely bearish and any rallies are still classed as corrective. Look for a lower top to now carve out below 1.3100, ideally by 1.2670, ahead of the next fresh downside extension back towards and eventually through 1.2145. Below 1.2145 exposes psychological barriers at 1.2000 further down. Ultimately, only back above 1.3100 would negate bearish outlook and give reason for pause. 
 
USD/JPY: The whipsaw price action from violent trade in early May has delayed our outlook but certainly does not change our overly constructive bias. The medium-term higher low from early March just over 88.00 remains intact, with the market stalling out ahead of the level, and we now look for a push higher from here back towards and through next key topside barriers by 95.00. Only a break back below 88.00 would negate and give reason for pause. 
 
GBP/USD: The market has finally taken out the key 2010 lows by 1.4780 to confirm a fresh medium-term lower top by 1.5500 and open the next major downside extension towards critical psychological barriers by 1.4000 over the coming days. At this point however, with daily studies looking stretched, the market has entered a period of consolidation to allow for daily studies to unwind, and we would not rule out the possibility for a short-term corrective bounce back towards 1.4700-1.4900 before bearish trend resumption. It is worth noting that the 78.6% fib retracement off of the major 2009, 1.3500-1.7050 move, has been tested in the 1.4200’s, and this area could provide the necessary support to help trigger a bounce.  
 
USD/CHF: The overall outlook remains highly constructive and while daily studies do not rule out the possibility for some form a pullback to allow for technicals to unwind, any setbacks should be very well supported ahead of 1.1200, in favor of an eventual push towards 1.2000. In the interim, short-term support comes in by 1.1430 and a break and close below will be required to trigger the onset of a short-term corrective pullback. 
 
 
FLOWS
 
Middle East names offering Eur/Usd on rallies. US prime name demand for Eur/Gbp; US investment house on the offer. Model funds back on the bid in Aud/Usd. Local names bidding Usd/Cad on dips. 
 
TRADE OF THE DAY
 
No Trade: Nothing new just yet and we will continue to watch and look for any opportunities that may materialize over the coming hours. 
 
 
PORTFOLIO OVERVIEW
 
P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010. 
 
p&l
 
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com 
If you wish to receive Joel's reports in a more timely fashion, e-mail instructor@dailyfx.com and you will be added to the "distribution" list.

 

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