Investors Waiting for Second Quarter Corporate Earnings

Risk aversion is back as investors await US 2nd quarter corporate earnings. Poor performance, particularly from banks and financial institutions, will likely drive up demand for the safe havens of the US dollar and the Japanese yen. The return to risk aversion has already affected currency exchange rates putting downward pressure on high yielding currencies like the Aussie and New Zealand dollars.

Mixed Economic Signals

Currency experts have been receiving mixed signals on the global economy. Fabian Eliasson of Mizuho Corporate Bank stated, “We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction. As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”

The G 8 Summit

Also affecting currency exchange rates is the G 8 summit which started Wednesday in Italy. China and Russia had been expected to force a discussion of an alternative reserve currency but at present no such discussion has taken place. Chinese President Hu Jintao who was to attend the conference returned to China to deal with the unrest and violence in the Xinjiang region.

Yen at Month High Against the Dollar

Japanese investors, betting that US corporate earnings will drop are repatriating assets pushing the yen to its highest level against the dollar in a month. Hidetoshi Yanagihara of Mizuho Corporate Bank stated, “The risk-aversion trade is still prevailing in the market. Everybody is now aware that it might take some time to see a real recovery of the U.S. economy.”  Currently the dollar to yen rate is 94.75.

Both the euro and pound declined against the dollar. The euro to dollar rate is at $1.3915 and the pound to dollar rate is at $1.6121. Forex investors are concerned that new efforts to stimulate the UK economy will result in a debasement of the pound. For the next few days the G8 conference is expected to influence global markets.