Is Risk Appetite Picking Up?

With high-yielding currencies gaining momentum and the favorite safe haven assets paring their gains, it looks like risk appetite picked up in markets yesterday. But was that really the case, or are we just missing a few points?

EUR advanced despite weak economic data

Yesterday we saw the euro gain against most of its major counterparts despite the release of weak French GDP data and lingering fears of debt contagion. Even EUR/JPY, our own barometer of risk, closed 133 pips above its intraday lows! So what happened to expectations of debt contagion in the region?

As it turned out, the ban on short-selling bank and insurance stocks in France, Belgium, Italy, and Spain helped contain bearish speculations in the European markets. In addition, the euro bulls got excited when Italy’s cabinet approved new austerity measures that would cut government spending by $64.6 billion over the next two years. Add to that the news of Germany’s Angela Merkel and France’s Nicolas Sarkozy meeting up next week and you’ve got yourselves some optimistic investors counting on bullish reports.

Still, unless Merkel, Sarkozy, and the other euro zone officials come up with a solid plan over the next few days, the region’s fundamental problems will continue to limit the euro’s gains. In fact, once the dust from the currency bulls’ rampage has settled, traders might go back to worrying over the euro zone’s financial problems and even the global economic growth in general. After all, French and Italian banks are still heavily exposed to sovereign debt, while the verdict is still out on whether the Italian government can dramatically tighten its purse in the next two years.

Favorite safe-havens eased from record highs

Okay, so maybe the rally of the euro and other high-yielding currencies wasn’t solidly supported by fundamentals. But what about the favorite “safe havens” gold and franc paring back their gains in the last two days? Isn’t that usually a sign of risk appetite?

You might have a point there. For the last two days we’ve seen both the franc and gold ease from their record-breaking highs. After reaching a low near .7100 early last week USD/CHF closed the week almost 700 pips higher at .7775. Meanwhile, spot gold also fell from its record high of $1,817.30 and actually capped the week at $1,748.20. As the School of Pipsology tells us, prices of safe haven assets usually go up when investors are uncertain about the markets.

Risk appetite back in style?

But while improvement in risk appetite certainly helped bring down these safe havens from their record highs, there were also fundamental tidbits that might’ve accelerated the move. For one, the Swiss National Bank (SNB) Vice Chair Thomas Jordan rocked the franc pairs when he mentioned that the SNB is considering temporarily pegging the franc against the euro. Yikes! On that day alone the franc fell by 4.6% against the Greenback and 5.3% against the euro. Recall that the SNB had also been actively weakening the franc since last week when it surprisingly cut its interest rates and even announced its plans to expand bank deposits.

If we take a look at gold prices we’ll see that it also struggled to make new highs on Thursday when CME Group Inc. (CME), the owner of NYMEX, jacked up the minimum deposit required to trade its 100-troy-ounce gold contracts by 22%. Though the new rule has minimal impact on the hardcore gold traders, it certainly influenced a few contract holders to take some profits on their long positions.

Speaking of taking profits, another possible explanation for the safe havens’ tumble is the simple case of profit-taking. After the strong moves that we’ve seen last week, who could blame investors for bagging some moolah? Besides, some market geeks are already saying that the franc is overvalued by as much as 71%, while gold’s consecutive sharp gains had been making contract holders skittish on the consistency of the gold’s rally.

Of course, the reasons I stated above are just alternative explanations for some signs that risk appetite is picking up. For all we know traders are really ready to buy high-yielding assets after last week’s sharp selloff.

Do markets now have more reasons to buy high-yielding currencies? Are traders just waiting for good retracement levels? Is Justin Bieber really a dude? I guess what I’m saying is that we need to consider different fundamental and technical angles as well as these and questions (except the last one) in entering your next trades.

How about you? Do you think that risk appetite is picking up, or are there any other explanations? Give us a shoutout on the boxes below, or even on my Twitter and Facebook pages!

2 comments

  1. just a trader

    While my usual gauge for risk on/risk off is the AUD/CHF, the “noise” around the CHF makes this gauge not as reliable at the moment.  I cannot get on board with the risk on approach at the moment…not when the 10 and 30 yr treasury futures showing strength despite a negative 30 yr auction.  So for now, it appears that the USD and US Treasuries are the de facto signals for risk on or risk off.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>