Currency Market Bull Trend Stalling as Growth Forecast and Financial Stability Lose Traction

High volatility has carried over from last week owing largely to low levels of liquidity that amplify intraday market swings. However, despite the high level of activity in the market, direction is still a missing vital component of the long-term bull trend that investors have steadily funded since the reversal in risk appetite back in March. Once again, the question of whether the past six months have represented a genuine bull market or merely a bear market retracement is being posed.

• Currency Market Bull Trend Stalling as Growth Forecast and Financial Stability Loose Traction

• Will Bullish Speculation Relent to a more Bearish Fundamental Outlook?

• Fed Ruling May Test Investors Confidence in Market Stability

High volatility has carried over from last week owing largely to low levels of liquidity that amplify intraday market swings. However, despite the high level of activity in the market, direction is still a missing vital component of the long-term bull trend that investors have steadily funded since the reversal in risk appetite back in March. Once again, the question of whether the past six months have represented a genuine bull market or merely a bear market retracement is being posed. Eventually, genuine fundamentals and the sedate forecasts they project will have to be reconciled with the steady rise in investor sentiment; and at these levels it is increasingly clear which is growing overextended. Most capital markets have shown an unbroken, bullish bias that has retraced a significant portion of the unprecedented losses through the 2007-2008 financial crisis. For the popular equities market, the benchmark Dow Jones Industrial Average has advanced nearly 50 percent from its lows in the first quarter. What’s more, the index has risen for every one of the last eight sessions. Yet, thanks to easily compiled volume data, we can see that the conviction behind this move has become severely taxed. Not only has the general investment in this market cycle started to deteriorate since it began; but the weekly average has fallen to its lowest levels for the year. For the FX market, the progress of risk appetite is reflected in the performance of high potential currencies against those that are stationary or deteriorating (as measured by yield). Both the dollar and Japanese yen have developed relative levels of support over the past weeks against counterparts like the euro, Australian and New Zealand dollar.

While congestion has become a common sight across the markets, it is clear that the general bias is still positive. Speculative interests are well supported – especially with a considerable portion of the market’s investable capital still held in relatively ‘risk-free’ securities like Treasuries and money market accounts. Nonetheless, the influx of capital cannot be sustained on capital appreciation alone. Eventually, the profit potential in investing in an oversold market will dry up as demand for return quickly overwhelms the yield that the global markets can support. Just when will this shift happen is a matter of significant debate. Policy officials have carefully articulated their forecasts for growth by suggesting an initial recovery from the worst recession since WWII will be followed by a period of weak expansion. Naturally, this is not the type of markets that wealth and yields grow in. What we await now is a catalyst to align the markets to fundamentals. The most immediate threat is the recent ruling by a US court that the Federal Reserve must release the details it has on hand of its emergency lending programs (with names and amounts) by August 31st. While this ruling can be appealed and delayed; it could still unsettle confidence in the credit markets and fuel fears of another wave of runs on banks (the kind that led to the collapse of Bear Sterns and Lehman Brothers). Even if this threat never materializes, there are still many other active hazards. Recently, the FDIC reported the number of troubled banks rose to a 15-year high 416. The market cannot support issues like this for very long.