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The Half-Hearted Risk On Rally

Last updated 8/10/2012 4:57 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Risk On! But Only Halfway

The North American trading session kicked off with some exciting and encouraging moves in many asset classes as equities, commodities, and currencies all gained in succession. The disappointing part about it though was that the moves occurred only during the first half of the trading day. If you were expecting to take advantage of some post lunchtime market moves, you were sadly mistaken. The urge to trade early and get out of dodge won out with investors who weren’t already on vacation, and volatility dropped to virtually zero. So let’s talk about what actually DID happen in the early part of the day.

There were only a couple of major economic releases that created the early volatility, but confused many market participants in the reaction to them. The confusion came in to play because the headlines looked to be overwhelmingly risk off, but didn’t tell the whole story. Economic data out of Asia, Europe, and North America was either terrible or uninspiring. In Asia, Chinese Imports and Exports both rose much less than expected, New Zealand’s Electronic Card Retail Sales missed badly, and even the Reserve Bank of Australia tried to pour a little water on the never ending rise of their currency by mentioning their concern with its value. In Europe, inflationary figures either came in right on expectations or just below, giving no barriers to central bankers providing additional monetary stimulus measures. And in North America, Canadian Net Change in Employment showed a dismal drop, missing expectations by a wide margin. The last bit of information out of Canada provided the most logic defying data of the day, but actually made sense if you dug in to the report a little.

Details, Details, Details

Let’s start with the Chinese data. Exports rose only 1.0% with an expectation of 8.6%, while Imports rose 4.7% with an expectation of 7.2%. Neither number is anywhere near where the pundits figured they would be, and that loud smack you heard was from those same pundits smacking their collective heads as they had written that the Chinese hard landing was out of consideration. While it is worrisome that the Chinese government actually reported bad results, it is important to note that China’s central bank has a lot of ammo available to fight slowing conditions. Either an interest rate cut, or a Reserve Requirement Ratio cut could be upcoming very soon which would spur risk markets. The expectation of that outcome has given hope to currencies like the AUD and NZD that are heavily reliant on the Asian giant and its hunger for raw materials, which offset the bad data out of those regions.

In Europe, Consumer and Producer Price Indices (Indexes?) were all below expectations across the EZ and UK. These values didn’t create too much fanfare mainly because the European Central Bank and the Bank of England are already on record as being in a conciliatory mood. The ECB recently cut rates and is expected to announce some other sort of easing method along the lines of another Long Term Refinancing Operation, and the BoE hasn’t been shy about adding to their Quantitative Easing cycle. The main sticking point in Europe though could be the European Stability Mechanism which is still stuck in the German Constitutional Court. With a decision not expected until mid-September, any action by European Central Banks may not be effective enough on its own.

Moving on to Canada, the Canadian Net Change in Employment came in at a 30.4k drop with expectations of around a 9.0k rise. That loud groan you heard was from the Bank of Canada who has been surprisingly hawkish over the last few months about their economy. While the fact that 30,400 less Canadians were employed last month than the month previous, digging in to the data gives you the full perspective. The drop is mostly among part time positions which shed 51,600 jobs, but the good news is that there was an increase of 21,300 full time positions. The mere fact that Canadian businesses are willing to add full time workers to their staffs has been an encouraging outcome and the USD/CAD reversed the initial headline shock rather quickly once the details were sorted out.

Looking Forward

Next week will be chock full of more inflationary, and economic growth data that would make any third year economics student salivate. Unfortunately, it is still smack dab in the middle of the summer where liquidity will be scarce and we might just hit repeat on the type of price action we witnessed this week. If we’ve learned anything this week, it’s that we need to pay attention to when the market moving events are occurring and trade around them; the market may not move enough to wait. For a full rundown of next week’s major market moving events and some technical levels on daily charts, check out my on-demand webinar FX Fundamental Outlook .

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.