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FX Trading – Risk appetite has shifted dramatically from yesterday to today…

The Ireland news and related concerns are calming a bit, even though there is still plenty of attention on China after they bumped up reserve ratio requirements again today. Take a look at the VIX action yesterday (latest price bar); seems the market was ready for a risk-back-on type of day. The plunge in the VIX nearly erased the rise that came with the eurozone-led volatility. A move to new lows soon might be an indication that risk appetite can be sustained for a period of days or weeks … and flow into the currencies.

This abrupt calming in the markets comes coincides with an expected technical correction in the euro. After the move that’s beaten down the euro until this week, we were expecting to see a move back towards its daily highs, eventually failing again after approaching 1.4000. Right now the euro is likely to pull back towards its 72-hour moving average at about the 1.3600 level; from there it should go higher to 1.3820 and 1.3975 after that.

The British pound is moving with risk. As mentioned in the stop-loss adjustment Alert #364 earlier, the pound was pulling back as the US markets started up and digested today’s Chinese reserve requirement ratio hike. The pound could be finding some support at its 72-hour moving average after testing the upper bound of its downtrend channel. If the pound holds at current levels then we expect to see it jump to 1.6180 first; and then 1.6230 after that. But a convincing break of 72-hour MA combined with risk aversion would mean the forecast for the pound would change.

The Australian dollar is, naturally, the most impact by the Chinese RRR move this morning. Consensus expectations for additional RRR adjustments and substantial rate hikes in China are certainly worth keeping tabs on — risk aversion could easily dominate the technical set-ups. Nevertheless, the Australian dollar likely finds support here and then subsequently moves up to test US dollar parity again. But based on our intermediate-term outlook for US dollar strength, parity should provide tough resistance. Unlike the euro and the pound, the Australian dollar remains beneath its 72-hour moving average; this could bring resistance in earlier than 1.000 and make AUDUSD more vulnerable to interest rate developments in China.

USDJPY should be due for a pullback, as it has reeled off a period of strength not seen in quite some time. The price action, however, is looking as though this pair is not ready to stop yet. The narrowing upward channel would typically mean there’s some pullback to be had. But the sideways action after exiting the channel might mean the pair has a little higher to go still. It’s holding right around 72-hour moving average; a breakout here could easily get to 84 or 85. But strength might be capped until we see some pullback.