Measures of fear and risk are certainly skewed by the unusual conditions that have set in over the last few weeks of 2009. Looking at those indicators that are based on volatility, we see the effects of thin liquidity; but then again, it is also difficult to make an objective assessment of activity through stymied volume and open interest. In these types of conditions, we need to lengthen our horizons and look at the trends that have developed over the past month, three months and year. Risk – and the premiums that it entails – have dropped off significantly over the year. But looking back even further, risk is still high relative to the average levels of the past five to ten years and beyond.

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Unusually cold temperatures for the eastern United States, ongoing political turmoil and a steady rebalancing of supply-and-demand has maintained oil’s advance long enough to mark the commodity’s most consistent bull wave in over four months. While much of Wednesday’s progress was founded on the momentum in the impressive 16 percent-plus upswing of the past three weeks, there were additional fundamental components to keep the market elevated.

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Forex options and futures market sentiment points to short-term US dollar pullbacks, but overall positioning favors further dollar appreciation through the New Year. We previously called for continued US Dollar gains as markets unwound their previously one-sided positioning. Yet a more recent shift in market sentiment actually suggests that USD positioning is at bullish extremes—leaving the resurgent currency at risk of short-term pullbacks.  

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Barring near term pullbacks, Euro crosses look likely to continue lower in the weeks ahead. The Yen crosses are a mess.

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Barring near term pullbacks, Euro crosses look likely to continue lower in the weeks ahead. The Yen crosses are a mess.

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•    British Pound Dominates in Choppy, Low Volume Trading
•    Euro Down as ECB Says Loan Growth Slowed Further, Money Supply Contracted
•    Canadian Dollar Decline Keeps USDCAD Range Bound

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The US dollar, British pound, and Canadian dollar will face key event risk in the coming week, but the greater issue will be the return of liquidity following almost two weeks of low-volume holiday trade.

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If not trading very short-term swings or holding longer-term positions, it is not advisable to trade through the year-end liquidity drain. While it may seem that thin markets and leveraged volatility are ingredients for quick range trades; the rhyme and reason to fundamental and technical setups is dampened and the resulting price action is highly unpredictable.

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By popular demand, I have put together a video describing my Forex Options Weekly Forecast report in detail. Take a look below to gain a better understanding of the motivation behind the report and how you can potentially use it in your day-to-day trading.

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