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Trading Video: Risk Appetite Grows Extremely Quiet, RBNZ On Tap

Trading Video: Risk Appetite Grows Extremely Quiet, RBNZ On Tap

2016-08-10 00:30:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Volume on favored market assets (SPY and QQQ among them) ticked up but held at extreme lows, as did the VIX
  • The New Zealand Dollar faces the most concentrated event risk ahead with the RBNZ rate decision
  • Pound crosses are generating modest losses are persistent post-Brexit data, but what happens if it eases?

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Risk appetite grows quieter and quieter. While volume favorite 'market' ETNs and the VIX ticked higher this past session, we are still facing conditions that are undeniably extreme. There is certainly some fundamental and market backing for settled markets from some of this past year's more extraordinary moments. Fears of an imminent financial contagion have cooled and the so-called 'summer doldrums' are in full swing. Yet, does that justify the remarkable quiet and - in many cases - extreme high values with an otherwise unfavorable investment environment? Markets can emphasize and prioritize the appetite for returns over the assumption of risk so long as the circumstances support it. However, that unspoken allowance cannot go on forever.

For trading, it is important to maintain conviction but to trade what the market offers. I certainly have designs on a number of options should sentiment finally collapse, but those are trades that require abundant evidence of a change in tide. In the meantime, short-term options that look to take advantage of passing swings in speculative interest without treading into the systemic can balanced risk. For long-risk, US equities and indexes like the S&P 500 are poor options given their extreme levels. Emerging markets, certain FX carry pairs, commodities and other 'cheap' sentiment-oriented options offer less resistance. That said, even USD/JPY which has technicals and a lingering BoJ threat doesn't offer the necessary lift to cover the short-term swing I was looking for late last week.

Ahead, event risk will remain light and themes still command the bulk of the opportunity - even if undetonated. The top catalyst on deck is the RBNZ rate decision. An expected rate cut draws traders' interests, but swaps are pricing in a hefty 99 percent probability of a cut which effectively drains much of its potential. Though a carry currency, even if the central bank does cut its rate to a fresh record low 2.00 percent, the currency may avoid a tumble and perhaps even rally as the Aussie Dollar did after last week's RBA cut. There are scenarios that can generate surprise and volatility, but they are unlikely. We discuss risk trends, Kiwi pairs and Pound crosses in today's Trading Video.

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