Dollar And Yen Firm Up As Risk Aversion Returns

Daily Forex Fundamentals | Written by GFT | Oct 15 08 09:29 GMT |

Top Stories Nikkei drops sharply post DJIA retreat and rumors of hedge fund liquidation, but rallies on the close Carry pressured as EZ equities trade lower Fed's Janet Yellen - US in a recession Media reports that Treasury Secretary Paulson wants weak hedge funds closed, rest regulated TED Spread, LIBOR remain elevated despite rescue efforts Oil well below $80/bbl at $77 as slide sees no end Gold weaker as well below $850/oz as $800 remains key support Overnight Eco JPY Current Account.9T vs. 1.15T forecast EUR Final CPI -0.1% as expected GBP claimant count bit better but unemployment rate rises EUR CPI 3.6% vs. 3.8% suggesting that itmay have peaked Event Risk on Tap USD Retail Sales markets expects -0.3% USD PPI forecast to contract further to -0.4% Price Action USD/JPY pressured all night long to 101 level as equities go wobbly AUD/USD off 100 points to 6950 as risk appetite wanes GBP/USD holds firm at 7450 employment data mixed EUR/USDpivots 1.3600 as carry selling pressures but real money demand props up below Dollar and Yen Firm Up as Risk Aversion Returns Global equity markets retrenched after two days of strong rallies, pulling high yielding currencies down with them as a touch of risk aversion returned to the foreign exchange market and both dollar and yen firmed. For the first time in more than a month volatility was subdued as traders attention moved away from pure macro concerns to more micro economic factors. On the economic front the employment data from UK was relatively mixed with the claimant count not rising as steeply as the market had forecast at 31.8K vs. 35.5K projected. Nevertheless, the rolls were markedly higher than 6 months ago and the unemployment rate climbed to 5.7% from 5.6% forecast.Cable, however, showed little reaction to the news with prices remaining steady near the 1.7450 level. Pound's relative strength was primarily due the selling in EURGBP which helped prop up the unit on the relative basis. If stock prices continue to slide into the North American open 1.7400 is likely to give way, especially as 1.7500 now stands as key psychological resistance to the upside. Sterling will receive no support from UK fundamentals in the near future given the dour state of affairs in the country's economy, therefore any rallies are likely to be driven primarily by carry trade flows. The EUR/USD tried valiantly to hold 1.3600 for most of the early European session, but the pair was finally battered by risk aversion selling as equities drifted lower across the board.The currency market continues to be uncertain about the impact of the latest G-7 measures to stabilize the global banking system with many key metrics of risk such as LIBOR and TED spread remaining significantly elevated from their normal levels despite the best efforts of monetary and fiscal authorities to inject liquidity and capital into the financial sector. One of the key concerns regarding Europe is the that the region's banks are actually more leveraged than those of the US and still present a very substantial systemic risk should their assets decline further. On the economic front EZ CPI eased to 3.6% from the prior months reading of 3.8% suggesting that inflationary pressures may have peaked and opening the way for ECB to lower rates further before the end of the year. Ironically enough the cooler numbers had no negative impact on the pair because yield is no longer the story in FX.In an environment of universal global monetary easing rate differentials hold less interest for traders while balance sheet strength becomes a much greater concern.In a global economic slowdown return of capital trumps return on capital and to that end the lower yielders with positive Trade and Budget surpluses such as the Swiss franc and the yen should outperform assuming they are able to maintain their net current account surplus conditionfor the foreseeable future. Finally, the North American session sees US Retail Sales and PPI today, but unless the news is markedly different from consensus, the impact should be relatively modest as most traders anticipate softer numbers. After what seems like a lifetime of volatility,equity price movements should become more mutedwith majors likely remaining in reasonably narrow ranges for the rest of the day. FX Upcoming Currency GMT EST Release Expected Prior USD 12:30 8:30 USD Advance Retail Sales (SEP) -0.3% -0.7% USD 12:30 8:30 USD Producer Price Index (MoM) (SEP) -0.4% -0.9% Boris Schlossberg http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.