Markets Nervous

The yen vs. euro rate hit a two week high on Friday and the dollar rose for the second straight session as investors trimmed exposure to risk. Falling stocks in the US and Europe sent traders and investors in search of safe haven assets. The yen and the greenback rose against other major currencies prompted by a return of risk aversion. Sebastien Galy of BNP Paribas SA said, “The market is very nervous, and there are not a lot of risk takers right now “The market is very nervous, and there are not a lot of risk takers right now. There’s one big trade, the dollar short trade, and people are feeling increasingly nervous about it.”

Falling Commodities Pressure Loonie

The Canadian dollar, also known as the ‘loonie’ fell on Friday as falling equity and commodity prices pressured the currency. A drop in gold and oil prices pressured the commodity linked loonie. Falling commodity prices also pressured other commodity based currencies including the Aussie and Kiwi dollars which had been recent big winners in currency markets. Bank of Canada Governor Mark Carney said that the Canadian economy posted worse than expected third quarter results and that the Canadian economy risks more setbacks due to recent gains of the Canadian dollar. Matthew Strauss of RBC Capital Markets stated, “We are very much caught up in the broader theme of risk aversion that has gained further momentum overnight. On the back of that we saw equities selling off, commodities selling off and then on the flipside the U.S. dollar rallying. There is no surprise that the Canadian dollar struggled overnight versus the U.S. dollar.”

Investors Concerned About UK Banking Sector

The pound declined against the US dollar, euro and the yen on investor concerns about massive UK deficits and concerns about the health of the UK banking sector. The pound fell a full 1% trading at $1.6509 on Friday. Against the euro the pound fell 0.6% to 90.07 pence and fell 1.1% against the yen to 146.74. Divisions in the Bank of England Monetary Policy Committee have also been a source of investor concern.

Risk Aversion Returns

On Thursday the US dollar and the Japanese yen rose in the latest back and forth between risk appetite and risk aversion. Stock market declines sent investors in search of safe haven assets. The euro vs. yen rate dropped more than 1% and recent winners such as the commodity linked Aussie and Kiwi dollars fell. Many analysts see investors as becoming cautious in advance of the year’s end and the perception that recovery may be a long way off. Boris Schlossberg of GFT Forex stated, “We’re running out of gas as far as recovery momentum goes. People have started to take money off the table as we’re getting close to the year-end because they want to make sure they can lock in all the profits they had on the long side.”

Germany Faces Extended Recession

An economic advisor to the German government said in an interview with Reuters Television that Germany could face a double digit recession in 2010 and 2011 as the government withdraws stimulus measures. Many investors and traders see recent economic data as not living up to expectations and predictions. Steve Barrow of Standard Bank said, “There are some indications of a rise in risk aversion - stocks have come off, and there are slight concerns that a lot of data recently has not been living up to expectations.”

US Stocks Retreat

The euro vs. dollar rate fell 0.5% and the currency traded at $1.4884. Against the yen the dollar fell 0.7% to 88.77 yen. US stocks retreated and investors and traders were concerned by actions by the Brazilian and South Korean governments to limit hot money flows into their economies. The dollar index DXY rose 0.3% to 75.384 after hitting a fifteen month low early in the week. The Aussie dollar hit a two week low and fell 1% against the US dollar to US$0.9202. The Kiwi fell 1.9% to US$0.7319.

Dollar At 15 Month Low Monday

On Monday the US dollar hit a fifteen month low as investors speculated that US interest rates would remain low for an extended period. The pound was hammered by news that Fitch said that the UK was at risk of losing its triple AAA credit rating. Fitch said that of the four major economies the UK was most at risk and the news sent the pound plummeting in currency markets. David Riley of Fitch said that if there was a further stimulus package offered by the UK government the highly indebted country is at risk of losing its superior credit rating. Lutz Karpowitz of Commerzbank stated, “The Fitch news was a reminder of the longer-term issues facing the UK.”

Pound Hammered on Rating Concerns

The pound fell from a three week high of $1.6844 on Monday to as low as $1.6600 and last traded at $1.6655, a decline of 0.6%. Against the euro the pound fell to 90.00 pence per euro. A decline in European equities and falling oil prices dampened risk sentiment and the euro hovered around $1.50. A weaker than expected German ZEW survey showed investors more pessimistic than at any time in the last four months. James Hughes of CMC Markets stated, “The ZEW was a pretty weak number, but the fall in the euro wasn’t huge initially and it quickly fizzled out. It looks like the whole theme of dollar weakness will dominate for some time to come, as long as (monetary and fiscal) stimulus remains in place.”

Dollar Index Up

On Tuesday the dollar index which measures the US dollar against a basket of six major currencies was up 0.2% to 75.176 .DXY. Speculation that the US will continue to keep rates low has enabled investors to use the dollar for carry trades to finance the purchase of higher yielding assets especially when stock markets rally. Officials from the US Federal Reserve are expected to speak Tuesday and investors will be looking for any changes in US monetary policy.

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US Unemployment at 10.2%

The US dollar fell against the Yen as US unemployment rose to 1.2% fueling speculation that the Federal Reserve will keep rates low well into 2010. The US unemployment rate is now at a twenty six and a half year high. The figures dampened hopes for a quick end to the ongoing recession that has plagued the global economy since early fall 2008. David Tien of Fischer Francis Trees & Watts stated, “Near-term, it adds to the uncertainty of the recovery, but it also reinforces how much longer we are going to need lower rates. It solidifies the outlook for plentiful liquidity going into the middle of next year.”

Commodity Based Currencies Gain

Once again commodity based currencies were winners in currency markets. The Australian dollar rose 0.6% to US$0.9166 while the New Zealand dollar rose 0.4% to US$0.7245. The Canadian dollar fell to 92.95 U.S. the lowest since November 3rd. Dismal employment figures from both Canada and the US prompted the declines of both currencies. US employers cut 190,000 jobs in October worse than most economists had predicted. The euro fell 0.2% against the dollar and traded at $1.4847. Some economists believe that the figures are not low enough to question global recovery but were low enough to keep US rates at record lows well into 2010.

Dollar Could Fund Carry Trades

The greenback was little changed against most major currencies. The widespread belief that the US will keep rates low has fueled speculation that the US dollar may replace the yen as the currency of choice to fund carry trades. Both currencies are widely seen as safe haven assets but the recent unemployment figures from the US have benefited the yen.  Samarjit Shankar of BNY Mellon stated, “The yen has obviously benefited … from risk aversion. The big psychological impact was from the 10.2 percent unemployment rate. It’s going to cast further doubt on whether the incipient U.S. economic recovery can be sustained without further government support.”

G 20 Conference This Weekend

The upcoming meeting of the G 20 finance ministers and central bankers takes place this weekend in Scotland and is sure to be the main focus among traders although currencies are not included in the formal agenda.

Dollar Rises on Banking Woes

The US dollar hit one month highs against other major currencies on Tuesday as banking woes and weak stocks dampened risk appetite among investors. Stocks fell on both sides of the Atlantic and concerns about the health of several UK banks prompted risk aversion. Banking giants UBS UBSN.VS posted disappointing results and UK banks Lloyds and Bank of Scotland underwent shake ups. Adding to the banking sector’s woes the European Commission said that stress tests of Euro Zone banks showed that losses could reach 400 billion euros ($590.9 billion USD) Omer Esiner of Travelex Global Business Payments stated, “We saw investors focus once again on the health of the banking sector. Stocks were generally lower and that has rekindled demand for safe-haven, low-yielding assets like the dollar and the Japanese yen.”

Euro Zone Bank Losses Projected

The ICE Futures U.S. dollar index .DXY rose 0.4% to 76.580, the highest since early October. The euro vs. dollar fell 0.8% to $1.4656. Analysts attributed the Euro’s decline to the European Commission’s estimate of Euro Zone bank losses in 2009-2010. The euro also dropped 0.8% against the Japanese yen and traded at 132.35 yen and the US dollar traded at 90.29 yen. During the current recession the US dollar has been seen as a barometer of risk sentiment among investors.

Investors Cautious

Investors remain cautious in advance of this week’s central bank meetings and the G 20 conference scheduled for this weekend. The meeting of the U.S. Federal Reserve starts on Tuesday and the European Central Bank will meet later in the week. On Friday the US jobs report is due. The Federal Reserve is widely expected to keep rates at near zero and most analysts believe this is unlikely to change in the near future. Andrew Busch of BMO Capital Markets stated, “I don’t think the Fed is going to be in a big hurry to do anything about interest rates going forward and certainly in their language I don’t expect any changes.”