Rally Not Sustainable
Last week’s rally in risk appetite has come to a screeching halt. Many economists had warned that the recent rally was not sustainable and that the ‘green shoots’ theory of economic recovery was premature. Despite positive US data investors remained concerned about economic prospects prompting a return to risk aversion and affecting global currency exchange rates.
Euro Zone Economy Contracts at Fastest Pace Ever
Investors and forex traders noted that the Euro Zone economy contracted at its most rapid pace on record. Dismal economic figures from Germany, the Euro Zone’s largest economy, affected the euro to dollar rate with the euro declining significantly against the US dollar. The euro to dollar rate fell 0.4% to $1.3581 and the euro fell 1.2% against the Japanese yen to 129.11. The euro is expected to reach its biggest weekly loss against the Yen since January.
Optimism Unrealistic
Markets seem to be rethinking economic predictions that point to economic recovery and this has affected currency exchange rates and forex markets. Greg Salvaggio of Tempus Consulting stated, “You certainly can make the argument that the market got a bit ahead of itself. Things are getting better. But the optimism the market priced in about 30 days ago, well, it was not realistic to be that optimistic quite that soon.” Salvaggio also predicted a euro to dollar exchange rate of about $1.3450-$1.3710 by next week.
ZEW Report Due Next Week
Should risk aversion continue experts predict the dollar will gain against commodity based currencies such as the Australian and Canadian dollars which have gained in currency markets recently. US housing data to be released Tuesday will be important to investors and will affect some currency exchange rates. The German ZEW report will be the most important piece of economic data to be released next week and could affect future ECB asset purchase decisions.
As usual a return to risk aversion benefits the US dollar and the Japanese Yen which are perceived as safe haven currencies. Next week’s trading is expected to be volatile.
