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Aussie Dollar and Swiss Franc, Risk Sensitive but Less Erratic

Aussie Dollar and Swiss Franc, Risk Sensitive but Less Erratic

2018-08-14 01:06:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Volatility is risk, though many traders seek it out as if it represents sheer opportunity
  • The most active - and erratic - assets are currently emerging markets, but there are others with greater complexity like EURUSD
  • A connection to deep risk trends opens opportunity but less direct link to headlines can stabilize as with AUD and CHF

See how retail traders are positioning in key Aussie and Swiss Franc crosses as well as other risk-sensitive FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

Seeking Activity and Opportunity Isn't the Same as Chasing Volatility

Too often, when traders seek out opportunity, their first criteria is to identify volatility. It is human nature - or more importantly, a common cognitive bias - to assume that our trading prowess better than our experience likely implies. With the belief that we select good trades out of hand, the missing ingredient seems to be the application of volatility. That is why so many novice traders begin their careers by trading around high-profile scheduled event risk. In reality, volatility is the very definition of risk. While it does indicate markets are prone to faster and larger moves, it is also the case that such a state increases the chances for sudden course reversals. While there is virtue in engaging markets that actually move, it is far more important to performance over time to pursue opportunities that are more likely to hold clear course. That is the ever-present conflict between probability and potential. It is relatively easy to abide this logic when the broader markets are relatively restrained; but when there is more activity across the system or there are exceptional stand outs, the appetite for action can often override our sense of caution. It is therefore even more important to find this balance nowadays with the early vestiges of sharp volatility starting to show up.

Risk Severity Curve Chart

Aussie Dollar and Swiss Franc, Risk Sensitive but Less Erratic

The Problem with Favorite Risk Assets and Even EURUSD

When it comes to evaluating the risk in volatility, the circumstances should be easier to recognize with the current leader for activity: emerging markets. This is a risk-sensitive asset that has grown dramatically in popularity over the past decade through the sharp increase in available exposure (ETFs) and an unchecked reach for yield that was forged in an environment of extreme monetary policy easing. These regions carry a lower credit quality and more erratic pace of growth as well as accessibility to markets, but that in turn is what leverages their return. In previous years as volatility continued to steadily deflate, it was little surprise that this became a favorite outlet for speculative funds. Now, however, activity has grown more tumultuous and certain EM countries are at the center of the drama. China, Turkey, Iran and Russia are just a few of the countries that have come under pressure from the United States tariff and sanction drive. With volatility returning, the true risk in these assets has become readily apparent. Even more standard fare on the investment spectrum carries a dangerous level of risk. Equities for example may seem a more stable and value-dependent asset, but the run they have cultivated over the past decade makes them as sensitive to risk as more unorthodox products. Even EURUSD deserves a closer look owing to risk trends. While typically sporting a more reserve risk profile, this benchmark pair has actually seen its sensitivity amplified by the direct threats and indirect actions taken by the US to place pressure on the Euro-area's financial system and economy. Extra care should be taken nowadays when engaging the market for volatility.

EUR/USD vs. SPX Daily Chart

Aussie Dollar and Swiss Franc, Risk Sensitive but Less Erratic

Appeal in Connection to Systemic Them but Less Volatility for Aussie Dollar and Swiss Franc

To better orient our trading to take advantage of the systemic opportunities in the system while avoiding illicit indecision of popular 'risk assets' (as with emerging markets) or the complications of a nuanced fundamental backdrop (such as EURUSD), we should consider options that are perhaps less popular but appropriately positioned. On the risk side, we have the Australian Dollar. This currency is a carry which has seen its yield drop to a record low with little sign from the central bank that a return to form is on the horizon. Yet, this isn't a candidate that is directly tied to emerging markets or the biggest players in the trade wars. If risk trends rise or fall, this currency is likely to respond in kind, but its caveat list will remain fairly short. Alternatively, for safe havens, the US Dollar seems to be in favor but it carries the mark of a currency that has been at the center of the trade wars and sanctions. It is a matter of time before a collective retaliation is mounted. Gold is another historical favorite that continues to defy its role through the USD's advance and reticence of benchmarks like US equity indices to retreat. Eventually, it may fall into line, but for now it continues to dive. One traditional safe haven that is particular adept at our present situation is the Swiss Franc. Not only is it a safe haven and harbor for funds looking to avoid tax collectors, the country is overtly neutral when it comes to issues like trade wars. We take a look at the equally-weighted indices for the Australian Dollar and Swiss Franc in today's Quick Take Video.

CHF Index Daily Chart

Aussie Dollar and Swiss Franc, Risk Sensitive but Less Erratic

If you want to download my Manic-Crisis calendar, you can find the updated file here.

--- Written by John Kicklighter, Chief Currency Strategist for DailyFX.com

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

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