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Risk Turn into Weekend Warrants Caution

John Kicklighter

I'm not at all confident that the rally in risk trends (hit to the dollar) to end this past week was the start of a new trend, but it does curb immediate ambitions to build on a bear trend. More than just a bullish or bearish view on investor sentiment, I'm looking for the establishment of a lasting trend. It isn't impossible to find such conviction next week, but it will certainly be much more difficult.

As for my positions held into the weekend, I still have a moderate level of risk exposure in my short NZDUSD (from 0.7995) and AUDCAD (from1.0455) trades. Both are still in the money, but they have given back a lot of their gains. That said, neither has set new swing highs. With AUDUSD as a benchmark in its potential to hold a former trendline support as new resistance, this could be a correction in a larger trend - but we have yet to really establish that trend.

My interest in testing the water with other risk-sensitive currency pairs is substantially diminished. There are few, risk-positive setups that really strike me for short-term potential (I am very skeptical of a lasting move towards optimism - given growth, yield, financial stability questions). In shorting risk, I have exposure; and I wouldn't want to overleverage the theme without the potential for follow through.

In the meantime, I will keep a close eye on EURUSD; which I feel is a good representation of risk appetite in general. With that historical 50% Fib of its historical range at 1.2135, a further move lower will take a significantly level of conviction. The same is likely true if we want to see a general risk aversion move across the broader capital markets.

As for the rest of my exposure, my EURCHF and USDJPY long setups have little exposure to the broader currents in investor sentiment. With a multi-month time frame, I'm waiting for fundamentals to play play out with both - the former finding the SNB caving and the latter fitting the outlook for yields/liquidity/credit stability/growth.