After hours of sideways trending, risk assets are once again on the move as the slow news day takes its toll on market participants. Although no specific catalyst has been identified as the driver of the latest takeoff in risk-assets, the lack of action is testament to the weak volumes and lacking liquidity in global financial markets as summer months see an absence of interest. Led by a pullback in USD from five-year highs seen yesterday after Fed President James Bullard spoke, the softness in the dollar has seen major currencies rise versus the dollar with precious metals and energy also benefiting from the USD retrace. However, in spite of the risk rally, investors need to remain cautious on positioning as momentum can quickly shift in the extremely thin market conditions. The name of the game is maintaining tighter risk-reward characteristics as swift reversals characterize less liquid marketplaces.
Equities are one area that has not benefited from today’s turnaround in higher yielding assets, with European benchmarks retreating after a winning streak that lasted over a week following the culmination of new Greek financing measures. Today’s market move resembles a technical pullback, marking an excellent time for speculators to find new entry points that are focused on trading existing medium-to-longer term trends. A 30%-60% retrace of recent moves in currencies and equities is likely in play as directional momentum cools before resumption of prevailing trends. Investors looking to benefit from the softness in dollar as the Federal Reserve cues up for liftoff should be wary of catching the falling knife, focusing instead on entering the market at predetermined levels. Trying to call the bottom of the retrace is exceptionally challenging, meaning the strategy of layering into a position will help with establishing a better entry point for the aggregate position while placing an emphasis on careful analysis of potential risk and reward in a market that is exceedingly sluggish.