Risk Appetite Pushes the Envelope

by Ashraf Laidi
Jan 2, 2009 16:01 | 23 Comments

Equities attempting to rally more than 25% off their lows after the last two major bounces were confined to less than 20%. In past bear markets, false rallies have extended to as far as 35% before selling re-emerged. The last 3 weeks of 2008 witnessed a moving way from risk-driven trades in currency markets (whereby dollar and yen strengthen during falling equities) and in favour of dollar-specific trading. But with risk appetite pushing higher and the VIX falling to 3 month lows at 40, we expect risk aversion trades to return soon. This would correspond to the following approximate market parameters; USDJPY 92.50, S&P 500 925, EURUSD $1.47 and Gold 850/oz.

Risk Appetite Pushes the Envelope - S&Amp;Pusdjpyjan09 (Chart 1)

The 32.4 reading in the December manufacturing ISM was the worst since 1980, while the 22.7 reading in the production index was the worst since 1948. The employment index tumbled to fresh 26-year lows at 29.8, while the price index continuing its collapse, reaching 18 from 25.5 in November and 53.5 in September. The survey is the latest example of persistent deterioration in the face of the Federal Reserve's aggressive easing. Market chatter already mentioning a figure of -450K in next weeks release of the December non-farm payrolls, thereby, re-addressing the theme of lowering expectations as well as margin of disappointment.

Gold little changed at $870 after failing to break above $890. Nonetheless, Wednesday's price action was technically favourable as the metal managed to close above its 200-day moving average in 2 consecutive days for the first time since July. $845-850 remains as a short-term support until portfolio reallocation flows set the next trend ahead. Subsequent foundation stands at $810.

GBPUSD continues to prove why USD has yet to garner fresh gains versus the GBP as the Bank of England is widely expected to resume its easing campaign as early as next week with a possible 75-bp rate cut to 1.25%. This may exacerbate export conditions for the Eurozone, whose currency is bound towards parity vs GBP. Unless the ECB clarifies its quest to further easing, 1.03 in EURGBP may be realized before mid January. GBPUSD faces $1.42 and $1.40 as the next key levels of support.

Comments (Showing latest 10 of 23) View All Comments
andy
Nottingham, UK
Posted Anonymously
11 years ago
Jan 22, 2009 14:01
Hi ashraf,

How low will GBP/USD and the GBP/YEN pair go? Some said 1.05 and 85 to a pound by the end of the year. What are your outlook on the matter? Thanks

Andy
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 7, 2009 15:55
Steve,

I hope you took advantage of it. where do you sell? well, that depends if you want to open a short position or take profits? I mentioned in the Intraday update the 100-day MA which has been broken. $1.52 is just a matter time (61.8% retracement). Weekly chart suggests further upside towards $1.5270 at which time time bears can open fresh positions.

Ashraf
Steve
New York, United States
Posted Anonymously
11 years ago
Jan 7, 2009 15:36
Ashraf,

This GBP/USD is unreal!! When and at what price are we going to short GBP/USD? 1.52, target 1.36? Tks for your insight.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 6, 2009 19:23
Steve, I don't think it will go more than 145. but stay away after 143 ahead of event risk i.e. friday's payrolls. if youy want to play the risk appetite trade jump on AUSDUSD which now broke above 72 cents and could be heading towards 75 given OK retail sales.

Ashraf
Steve
New York, United States
Posted Anonymously
11 years ago
Jan 6, 2009 19:10
Ashraf,

This GBP/JPY is really something, you predict 139 high, now 140+, how high can GBP/JPY goes? Please advise. Thanks.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 6, 2009 18:15
Sajida you welcome. Ced, and so it was a matter of time before cable hit $1.50.. that's 500 pips in 2 days... I did expect $1.50 this week but not so early.

AUDUSD jist broke 100 day MA. 75 cent possible as wekkly stochs. still bullish.

Ashraf
sajida
Connecticut, United States
Posted Anonymously
11 years ago
Jan 6, 2009 16:45
Thank You Ashraf for taking out time to respond to all our questions and comments.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 6, 2009 15:18
Ced, BoE decision on Thursday (noon GMT). Cable has above 50% chance of $1.50 after the decision. I dont think we'll reach that high before it. As for rest if quarter, we coudl see another run lower below $1.41 before strong bounce towards $1.58.

Keep watching oil and CADJPY

Ashraf
Ced
London, UK
Posts: 12
11 years ago
Jan 6, 2009 14:26
Hi Ashraf, do you expect 1.50 in cable before or after tomorrows BoE meeting?
What about cable from now until end of Q1?
Thanks
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 6, 2009 14:01
Hi Hamish, yes indeed. Well, I always mentioned that EURUSD will recover towards $1.40 by year-end then drop back down towards low $1.30. I was expecting further upside towards $1.45-46 but that did not happen. keep an eye on AUDUSD breaching the 100 day MA at 92 cents and CADJPY above 80 yen

Ashraf