Investor Sentiment Shifting Toward Risk-Off Scenario

Forex investors did an about face from earlier in the week,ending the week by dumping higher risk assets. The sharp rise in the Yen andthe sell-off in commodity-linked currencies is a strong sign that investors areshifting toward a risk-off trading strategy.

Forex investors did an about face from earlier in the week,ending the week by dumping higher risk assets. The sharp rise in the Yen andthe sell-off in commodity-linked currencies is a strong sign that investors areshifting toward a risk-off trading strategy.

The Euro surged to the upside shortly after the New York opening and before the release of U.S. economicdata, briefly piercing the 1.30 level for the first time since early May.

The last thrust to the upside in the Euro was inanticipation of weak U.S.economic data which has been the main driving force in the Euro this week. Withtraders anticipating bearish reports, the release of a weak consumer sentimentnumber as well as consumer price report became a “buy the rumor, sell the fact”scenario.

Earlier in the week the Fed released a dovish outlook forthe U.S.economy, forecasting a lower Gross Domestic Product and a sluggish jobsoutlook. The European Central Bank, on the other hand, is more upbeat about theEuro Zone economy. The Fed is talking about renewing quantitative easing whilethe ECB sounds cautiously optimistic about the Euro Zone recovery. Thedifference in each central bank’s assessment of its economy is sending a signalthat the ECB may be closer to raising interest rates than the Fed. This isencouraging some light buying, but the majority of the rally in the Euro hasprobably been short-covering.

Technically, the EUR USD attracted selling pressure at aFibonacci number at 1.2998. After a prolonged move up in both price and time,the Euro is now trading lower, putting it in a position to post a daily closingprice reversal top. This pattern usually suggests the start of a 2 to 3 weekbreak or 50% of the last rally.

The weak U.S.economic outlook is driving investors out of higher yielding assets and intothe safety of the lower yielding Japanese Yen. A sharp sell-off in the U.S. equitymarkets is fueled a break in the Australian Dollar. The combination of a worsethan expected inflation report and weak U.S. stock market pressured the NewZealand Dollar. Weak equities and crude oil triggered a break in the CanadianDollar.

Technically the lack of follow-through to the upside in theAUD USD following the attempted breakout over the main top at .8858 helped topressure the Aussie on Friday. Based on the main range of .8315 to .8870,traders should watch for a correction to .8592 to .8527.

The current chart formation in the New Zealand Dollarsuggests a correction to .7948 to .6988 is likely over the near-term.

The USD CAD continues to remain rangebound and quite choppy.Continue to look for a choppy, two-sided trade unless the Dollar/CAD crosses1.0678. If this scenario develops, then look for an acceleration to the upside.This move will also be a strong indication that stocks and commodities areturning bearish.

The main trend is down in the USD CHF with the marketcurrently testing its lowest level since early April. A shift in investorsentiment out of risky assets could trigger a turnaround in this pair. Friday’saction suggests that a closing price reversal bottom is forming which couldlead to a massive short-covering rally next week. Based on the current chartformation, a breakout over 1.0675 will turn the main trend to up.

The GBP USD was under pressure on Friday following a strongweekly gain. Today’s weakness came as a surprise because this pair closed onits high Thursday. The sudden shift in investor sentiment is most likely a signthat investors feel the fading global recovery will hamper chances of arecovery in the U.K.and diminish hopes of a rate hike by the Bank of England.

Another sign that interest rates are likely to remain athistorically low levels was the strong gain in British Gilts. Like the Treasurymarket is for the U.S.economy, the Gilt market movement reflects how investors really feel about theeconomy. Since Gilts rose, yields fell, thereby signaling that traders arefactoring in lower interest rates.

The week started with the focus on U.S. corporate earnings, butquickly shifted toward the economy. While good earnings have been driving updemand, it appears that investors have decided that the economic data shouldcarry more weight. The question being asked is can corporations sustain earningsgrowth in the wake of a weakening economy? Today’s action seems to indicatethat the answer is no.

The key indicator to watch is the Japanese Yen. A rising Yenwill be a strong sign that investors are forecasting a weaker global economy.Commodity-linked currencies are likely to suffer the most if investors leantoward a risk-off environment.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More