US stocks traded higher on Wednesday morning, and into the afternoon on investor optimism over a resolution to the Euro zone debt crisis. Investors chose to ignore a disappointing start to earnings season, as Alcoa missed analysts’ forecasts. After closing slightly lower on Tuesday, the Dow Jones Industrial Average was trading up over 100 points as of early afternoon.
The market added to its gains following an agreement reached by parties in the outgoing Slovak government and Robert Fico, the Slovak opposition leader, to ratify plans to strengthen the EFSF rescue fund, as well as hold an election in March. Initially, the nation opposed the plan, and voted against it on Tuesday.
The expectations of a plan to recapitalize the Euro zone banks carried European shares higher for the day, and US banks enjoyed a boost from the European financial rally. Today’s rally in the Dow Jones Industrial Average caused the Dow to turn positive for 2011.
With so much emotion driving the markets, as well as an increase in risk-appetite, you may be wondering how to play a market that seems to be more of a Mood Ring, that one based on the fundamentals. As it will become increasingly more difficult to predict the effect that earnings reports will have on individual securities, currencies may be your best strategy to profit from general sentiment.
A Resolution To The Euro Zone Debt Crisis Increases Risk Appetite
The possible resolution to the Euro zone debt crisis has given rise to an increase in risk-appetite, and while a rise of over 2% in equities markets has been deemed achievable, investors are watching closely the forward guidance that is being provided by companies.
Even in light of strong corporate earnings Europe still remains in crisis mode, and how the debt crisis plays out in the coming months will surely effect global markets. Investors looking to capitalize on the market’s mood may want to look to currencies that have heavy foreign ownership, such as the Swedish krona.
With approximately one-third foreign ownership, and a handful of telecom and big tech companies, the krona has seen an 82% correlation between the S&P 500 and the krona-euro pair. In spite of the valuation in equities, there seems to be lingering downside risk, and analysts recommending purchasing the euro against the krona at 9.07, with a 8.95 stop loss and a profit target of 9.35.
Japanese Yen The New “Safe Haven”?
As Europe has been frantically searching for a resolution to the Euro zone debt crisis, the Japanese yen has quietly become more affordable according to some currency strategists. Although the USD/JPY has been trading flat over past couple of weeks, it has proven to be the best performing currency this year.
Although the yen has been affected by Japanese foreign bond buying, as well as foreign equity outflows, the currency should prove to be supported by an current-account surplus that while shrinking, remains sizable, as well as interest rates that are becoming less and less out of line with the rest of the G4.
Now may be the time to initiate a long position on the GBP/JPY, as it is currently trading in a bullish condition, and any intervention by the Bank of Japan could actually assist traders who are in long positions in this currency pair. The pair has already broken through the ST resistance level, and as long as it continues to trade above this level currency investors may want to keep an eye out for long opportunities with the next resistance level at 124.04.