Risk On or Risk Off…or Neither?
Joe Perry December 19, 2019 3:35 PM
Traders are doing whatever they need to do to wrap up for the year.
Earlier today, the Philadelphia Fed Manufacturing Index for December was released at 0.3, well below the forecast of 8.0 and lower than the 10.4 reading from November. This is the same level as June, and the lowest level since February. Upon release of the data, USD/JPY began moving lower, from 105.50 to 105.20. This is what one would expect to happen under normal market conditions: Bad data = risk off = lower USD/JPY.
Source: Tradingview, FOREX.com
However, at the same time, equity index traders took the opportunity to buy the S&P 500 into the dip, and it hasn’t look back since. Price has made all time highs again today, near 3210.5.
Source: Tradingview, CME, FOREX.com
So, is it risk on or risk off? Actually, it’s most likely neither. With the holidays approaching fast and with liquidity dying down into year end, traders are doing whatever they need to do to wrap up for the year. Some market participants may be “window dressing”. This may occur in thin markets, where large participants (such as mutual funds, pension funds, and some hedge funds) drive price in one direction to make their books look better at the end of a month, quarter, or year. Perhaps is occurring in the stock market today. Others may be taking risk off the books. For example, if someone had a large long position and was looking to end the year flat, today would be a perfect day to try and exit some (or all) of that position while stocks are moving higher. Can you imagine what would happen if they tried to exit the USD/JPY position while stocks are heading lower?
Source: Tradingview, CME, FOREX.com
Be aware that typical correlations in the market, such as a positive correlation between USD/JPY and S&Ps, may decouple heading into yearend. Don’t read too much into it, as it may just be market participants trying to wrap up trading and/or make their books look pretty for year end.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.