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Risk appetite conditions dial down

Thursday's session was characterized by an appreciation in the risk-off associated currencies the likes of the Yen, the Swiss Franc, the USD, and also the Euro. On the flip side, the commodity-linked currencies (AUD, NZD, CAD) alongside the British Pound all fell in equal proportions as the market re-assesses the 'risk on' dynamics.

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Scan of the markets

To see an expanded version, right-click and select ‘open link in new tab‘. The indices show the performance of a currency vs a G8 FX basket. 

Thursday’s session was characterised by an appreciation in the risk-off associated currencies like the Yen, the Swiss Franc, the USD, and the Euro. On the flip side, the commodity-linked currencies (AUD, NZD, CAD) alongside the British Pound all equally fell, as the market re-assesses the ‘risk on’ dynamics.

Optimism dials down 

I am assertive, that the global conditions are on track to improve to the point of envisioning sustained ‘risk on’ rallies, but that’s certainty not the environment that dominated on Thursday. As well as the poor performance by currencies linked to risk, the market experienced the fall in stocks and the rise in bonds.

We must recognise that markets don’t go up on a straight line, and periods of corrections are common. Especially after the strong appreciation in ‘risk on’ currencies on the back of Pfizer’s vaccine news.

Is reflationary trade here to stay?

My view is that the current reversal in risk dynamics is nothing out of the ordinary. The ebbs and flows of the market is backed by the fact that there are no structural breakouts in Forex. The assessment of the risk-off currency complex does not suggest that  the conditions will suddenly be a dreadful state.

The reflationary trade, where an upgrade of global economic conditions continues to be priced in, is still very much an outcome at play. There are going to be hiccups along the way as COVID-19 cases keep rising. The markets are and will be at risk not just due to a vaccine becoming available in the foreseeable future, but the change of power in the US presidency.

However, I can also envision how global conditions can make Central Banks more reluctant to engage in mass-scale liquidity provisions as they did this year. We should recognise the extent in which the market has become a slave of Central Bank’s unorthodox policies. This condition, if materialised, could hurt risk. But for now, there is not enough evidence for this contextual setting to take place.

Technicals in risk-off currencies

An image speaks a thousand words. A snapshot below will demonstrate why there is no reason to shift our focus from constructive ‘risk on’ conditions.

I’ve put together the performance of the US Dollar, the Japanese Yen and the Swiss Franc at an index level. These are the three currencies that are most sensitive to the risk profile. For now, all charts communicate the same story – one characterised by bearish structures.

Hot trade of the day

In this section, I pick a market or several ones that presented an opportunity to buy on weakness or sell on strength. All based on the higher timeframes outlook. My video analysis below, elaborates further on the logic behind the trade.   

A fully-fledged trading course, including lessons on how to trade this pattern, will soon be available via Global Prime Trading Academy website. While the video is intended as educational and not financial advice, it portrays the power of trading the pattern the right way.

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Recent economic indicators & events ahead

 

Source: Forexfactory

If interested in the best ‘free of charge’ News Indicator that displays data on past and future news in the Forex market via MT4, watch this video. The indicator allows you to save time and avoid mistakes.

Important footnotes

Market structure 

Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of market structures, refer to this video. Fractal breakouts is at the epicenter to assist us in the analysis of chart structures.

Market momentum

In order to assess the market momentum of a particular asset, I’ve promoted the idea of using what I call the smart money tracker. The settings and the indicator can be accessed via our Discord room, where traders from all walks of life interact frequently. In this video, I go through the layout and all elements of the Discord room in great detail.

Projection targets 

The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection.

About the author

Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.