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Risk Appetite Fades In FX - For Now

Thursday, 5 May 2011 | 2:44 PM ET

Between economic uncertainty, falling commodity prices, and so-so economic news, investors' appetite for currency risk is decidedly off. But for how long?

The currency market has been risk-on for a while, as economic conditions appeared to be improving and commodity prices lifted currencies of developing countries and exporters like Canada and Australia.

In fact, the Aussie dollar has hit a series of record highs already this year.

But in the last few days, investors have become more cautious, at least temporarily. Europe's sovereign debt problems are in focus, recent economic data has been mixed, central banks have sent mixed messages, commodity prices are falling, and officials are guarding against retaliations for the killing of Osama bin Laden - not exactly elements to whet investors' risk appetite.

The shift in mood is helping safe-haven currencies like the yen, which rallied against the euro today, and the dollar, which bounced up against a basket of other currencies.

But is it time to really shift trading positions, or should you make use of any pullbacks? Camilla Sutton, chief currency strategist at Scotia Capital, suggest sitting tight - but watching closely.

"I don't think the fundamentals have changed," she told me. "I think the market has become extended and we're having a healthy correction."

Sutton would change her mind, she said, if key currency pairs broke through support levels. She watches Australian dollar/Japanese yen levels closely, for example, and if that moves below 83.76, she would "expect more to come," she said. Other target levels she monitors: "Gold below 1,445, silver below 36.75, and the S&P index below 1339."

For now, Sutton still expects a lower U.S. dollar by the end of the year, at $0.93 against the Canadian dollar. She is also targeting the euro at $1.50 and the Australian dollar at $1.09.

CURRENCY FUTURES

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm.

"Money in Motion Currency Trading" repeats on Saturdays at 7pm.

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