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Risk Sentiment Picks Up into North American Session; Currencies Bid

Risk sentiment has reversed course ahead of the North American open, with traders shrugging off the selling in Asia and some weaker economic data out of Europe, to take a slightly more optimistic outlook. It seems as though some aggressive comments from IMF’s Borges are helping to inspire the rally, with the official on the wires offering some insightful and constructive resolution ideas to the eurozone crisis. More importantly, Borges says that authorities need to transition to a different level of detail and commitment in a second Greek bailout to avoid the cycle of drama recurring every three months.

Borges highlights the importance of the EFSF’s role in the crisis resolution and says that the fund should serve as a catalyst to bring other investors into the markets. Market participants have been looking for leadership more than anything else throughout the current turmoil and it is this type of guidance which is necessary in helping to temper investor concerns. Also seen propping sentiment have been some better than expected Portuguese auction results. However, we are far from out of the woods and it is still our suspicion that the current risk rally is nothing more than some corrective price action within a stronger underlying bear market.

Technically, many of the major currencies are looking stretched against the buck and could very well be due for some form of a recovery rally. The commodity bloc probably best represents this fact, with Aussie, Kiwi and Cad all putting in bullish reversal days on Tuesday and looking like they want to rally from oversold levels. In light of this price action, our strategy would be to stand aside for the time being and look for opportunities to scale into fresh commodity bloc shorts over the coming sessions. Selling Aussie back into the 0.9800’s, Kiwi into the 0.7800’s and buying Usd/Cad below 1.0200, would be ideal entry points.

Looking ahead, the European Central Bank and Bank of England rate decisions due out on Thursday and could provide an additional source of volatility as investors position ahead of the event risk. US equity futures have recovered and are tracking moderately higher, while on the commodity front, oil is well bid and gold consolidates recent moves.

Joel Kruger has over 10 years of experience in the currency markets in addition to his background in law. Blending fundamental and technical analysis, Joel’s reporting considers a variety of economic and financial cross-currents to give trader a comprehensive assessment of forex market activity. Joel covers the European and Asian market sessions for DailyFX.