Currency traders closely following equities for clues on risk appetite have witnessed equity indices’ two failed attempts to rally more than 25 percent from their lows since the intensification of the crisis in September 2008. In the event stocks do register a rally of this magnitude from their November 2008 lows in the first half of 2009, investors may rush in, touting the popular assertion that stock-market bottoms have typically preceded economic turnarounds by about five months.
But the validity of this investment tenet has already proven inaccurate in the current recession/bear market, as evidenced by the false bottoms in January, March, and October 2008, as well as in the recession/bear market of 2000-2002, which saw false bottoms in March and September 2001.
The prolonged risk aversion has yet to run its course in the first part of 2009, implying stock indices could return to their November lows and possibly continue lower by 10 to 15 percent. The flight to safety among forex traders is likely to regenerate broad interest in the Japanese currency, even against the U.S. dollar.
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