Risk Rally Gathers Steam
	Market Highlights: Market Rebound Continues  Canadian Dollar Bounces Back Yen Weakens Further  Journalists, Traders, and Nuclear Physics Best Rates Guaranteed with XE Trade. Get a Free Account Market Rebound Continues Friday’s improvement in market sentiment gained momentum over the weekend as Japan’s progress in repairing damaged nuclear reactors overshadowed the onset of combat operations over Libya. Traders increased their positions in higher-yielding asset classes around the world and implied currency volatility levels fell. Commodity-linked currencies such as the Aussie, Kiwi and Canadian dollars rallied against core funding currencies like the US dollar and the Swiss franc. As coalition-fired cruise missiles and airstrikes hit targets inside Libya, the oil price surged. Brent hit $116 a barrel and West Texas Intermediate contracts for delivery in May briefly moved above $104 in weekend trading. Libyan crude production has fallen by more than 75% since the rebellion began, and markets are expecting further cuts as hostilities escalate. Meanwhile, the dominos keep falling. Tensions in Syria, Yemen and Bahrain continue to rise, and oil traders are finding their blood pressure rising in kind. While all of these countries are relatively small oil producers, the complex relationships between them and larger countries such as Iran and Saudi Arabia are adding to a toxic geopolitical brew in the Middle East. Canadian Dollar Bounces BackThe Canadian dollar rebounded into the 97 cent range against the US dollar over the trading cycle, with several factors working to support it. The Canadian economy is relatively insulated from concerns about the Japanese economy, and is potentially poised to gain as reconstruction efforts increase demand for raw materials. With oil prices seemingly on a one-way track higher, and currency traders continuing to cling to the belief that Canada’s economy is commodity-based, the Loonie is attracting buying interest. At the same time, the sheer uncertainty and fluidity present in the global economy is driving asset managers to shift investments into safe harbours – and Canada’s perceived fiscal attractiveness is unparalleled among the major industrialized economies. There is a cost to all of this financial market uncertainty of course – it can materially influence the flow of money in the real economy. High commodity prices are also unlikely to leave the global economy untouched, leading many observers to downgrade worldwide growth expectations in recent weeks. The vulnerability of the Canadian dollar in this context should not be discounted – it has been the strongest performer among G7 currencies since the financial crisis as the global economy recovered. Icarus may yet come to earthYen Weakens Further  The Japanese yen dropped over the trading cycle, slipping decisively below the 81 barrier against the US dollar. Japanese markets are closed today for a national holiday, leaving trading conditions thin, but ongoing intervention by the Group of Seven central banks appears to be having the desired effect, causing traders to remove long yen positions and leading to widespread caution on the currency’s path. In other words, the speculators have left the sandbox now that the big kids have come to play. However, it should be noted that the G7 central banks didn’t intervene specifically to weaken the yen. Rather, they entered the market in an effort to stabilize the currency’s value by driving down volatility levels. A big unknown that is floating over the market is whether the banks will repeatedly step in to hold the currency's value down in the coming months, or whether they will allow the yen to rise slowly as the crisis passes. To complicate matters further, another possibility remains - what if the much anticipated 'repatriation' flows do not materialize to the expected degree? A growing number of analysts have observed that Japanese companies and financial firms retain extraordinarily large cash reserves, meaning that they don't necessarily require the liquidation of overseas assets in order to cover earthquake-related liabilities. If this perception becomes more commonplace, movement in the yen could enter a whole new phase, with central bank intervention efforts pushing down the yen at the same time that short sellers enter the market. For carry traders with large borrowing positions in the yen, these factors are of utmost importance – and for the rest of us, they simply provide yet another reminder that there are no foregone conclusions in the currency markets... Journalists, Traders, and Nuclear Physics As the tenth day since the Japanese earthquake passes, the worldwide financial markets continue to experience rapid and severe shifts on a daily basis. The nature of the crisis has evolved, as the threat of a nuclear meltdown has replaced the initial impact of the disaster in driving market movements. In this environment, it is important to remember that journalists and currency traders collectively have very little knowledge of the fundamentals underlying this particular crisis. The fundamentals, after all, are nuclear physics. Diminishingly few lines of accurate newsprint have been published, and the extreme swings in the market have made it clear that misunderstandings are widespread. When journalists and traders begin acquiring doctorate degrees in nuclear physics, we'll get a clear picture of what is happening - and markets will become less vulnerable to mispricing. In the interim, news headlines will continue to create less-than-rational market responses. For corporate hedgers, this means that short-term market entry opportunities may be abundant as exchange rates hit levels that would not otherwise be available. However, it remains prudent to maintain relatively high protection levels in the event that we see a return to the longer-term price trends that were in place prior to the disaster. Have a great week – and happy trading! By Karl Schamotta, Senior Market Strategist