Risk on? Not so fast

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As we reach the end of the month, risk sentiment seems to have returned to the markets although once again, whether moving up or down, traders do not seem to have the fortitude to follow through with their convictions. Earlier this week, the EUR seamed ripe to test support at 1.3000 and head lower. Then the support held and yesterday the trend changed and “risk on” was the flavor of the day. One of the reasons for this was the Italian bond auction did not go “as bad” as expected.

Apparently investors showed “confidence” in these bonds despite the election result. Well, the government is still “stuck in the mud”, so I for one am not convinced. But as often is the case, when “risk on” trades occur in currencies, the equity markets usually rally as well and yesterday was no exception. The DOW closed above the 14,000 level and the S&P closed above 1500. So risk appears to be back on, right?

Not so fast my friends! Once again, only this time on the upside, there has been no real follow through in the markets. EUR reached an overnight high of 1.3158, which was only marginally higher than the afternoon high during North American trading yesterday. The German jobless rate for February was reported at 6.9%, which was the same as January, and slightly short of the expected 6.8%. Unemployment fell 3,000, short of the estimated fall of 5,000 but better than the previous fall of 14,000. This news should have been positive for the single currency, but it has eased off from 1.3130 when this news was announced to the 1.3110 level.

What does this all mean? Traders are being cautious. We have the sequester issue here in the US that is set to occur if no budget deal is agreed upon today and most analysts don’t expect that to happen. It seems a certainty that the elected officials will spend most of today pointing their fingers at each other, but tomorrow many government functions will be furloughed. The USD has not really reacted to this, as most of the attention this week has been on Italy. We should start seeing “tape bombs” for the various news agencies today.

Technically for the EUR we are still in somewhat of a consolidation mode. Support at the very key level of 1.3000 has held, yet in order to reverse the downward trend we would need a clear break of 1.3300. At present, inside resistance remains at 1.3160, followed by 1.3185 and 1.3205. On the bottom support is mildly at 1.3100, with stronger support at 1.3080.

The commodity currencies were split on the “risk” move yesterday. AUD attempted to break the 1.0300 level falling just short at 1.0290 and is currently trading in the 1.0260’s. USD/CAD seemed to ignore the move with only a 25 point overnight range and currently trades around 1.0230, lower than yesterday but with no real direction.

As risk trades were added, the JPY weakened, moving back above the 92.00 to trade as high as 92.65, after Prime Minister Abe formally nominated Asian Development Bank president Kuroda to be the next BOJ governor. Traders expect the Kuroda central bank will be aggressive in pursuing easing when he takes command. Kuroda’s first meeting is in April so the USD/JPY still has plenty of time to trade up and down before then.

Back here in the US, we will focus on how Congressional leaders and President Obama handle the possibility of being sequestered. I guess on balance, given their definition, being “sequestered” is better than falling off the “fiscal cliff”. You gotta give some credit to the person that comes up with these terms. Anyways, if a budget agreement is not met, there will be about $85 billion dollars in spending cuts that will automatically occur tomorrow. If that’s the case. maybe the “ides of March” comes early this year.

So for the rest of today, look for some possible news out of Italy although I don’t think anything gets resolved there until after the weekend. As for US news, that could affect the currencies. Uncertainty in how the US handles these mandatory cuts could influence USD selling. EUR seems reluctant to break 1.3160 or for that matter 1.3100. It could end up a quiet last day of the month.

Further reading: Gold Stalls Rebound Just Under Key Resistance

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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