Risk aversion clouds the market

Tom Tong19/Aug/2011Currency Updates

GBP

UK retail figures came in at 0.2% as opposed to the expected 0.3%. To begin with there was little movement with GBP. This can be attributed in part to June’s upward revision in growth, it was upgraded to reflect an increase of 0.8%, what this means is that month on month growth translates to a 4.3% year on year increase.

By the afternoon GBP began to make gains across the park. This can be attributed to the fact that the UK now has a higher credit rating then the US and does not have all the troubles the Euro zone has – the UK effectively seems more stable than its counter parts. However with the MPC voting unanimously to hold rates, which has not happened in a long time, this could lead to the GBP struggling to sustain its current levels and appeal.

Today we see the UK release its public sector borrowing data. The market expects borrowing to drop from 12 billion GBP to 0.4 billion GBP. This report holds particular importance as it will demonstrate whether or not the austerity measures bought in to narrow the budget deficit are working. If borrowing is still high then the government’s ability to tackle UK debt will be severely questioned.

USD

Risk aversion hit the market yesterday, due to a combination of factors.

Firstly, concerns about the state of the European banks came back in to the fold, speculation that one European bank had to request an emergency loan for as much as 500 million USD from the ECB led to a sharp selloff in the stock market, the FTSE and DAX closing 4% lower and the Dow dropping by as much as 500 points.

Second, the US had a shocking day report-wise, with almost everything coming in worse than expected. Unemployment claims came in at 408,000, which is a massive concern as unemployment claims seem to be continually over the 400,000 level. Existing home sales data came in below the 4.91 million figure, at 4.67 million – a big drop off from Junes strong showing of 4.84 million, while the Philly Fed came in at -30.7, the worst showing since March 2009.

The only positive yesterday was CPI coming in stronger than expected. Prices rose by 0.5%, above expectation of 0.2%. This should boost the USD as it gives the FED less reason to raise interest rates in the short term.

There are no major data releases out today, investors and traders will turn to other markets to help gauge risk sentiment. With equity markets falling and the price of gold rising risk aversion should continue to cloud the market.

EUR

The Eurozone’s debt crisis continued to undermine investor confidence in the bloc, and this combined with risk aversion and a lack of Eurozone data led to the euro making heaving losses against lower-yielding currencies.

Morgan Stanley’s downgrade of global economic growth did little for the euro as investors and traders ran towards safe haven currencies. The report stated that both the US and Europe were dangerously close to a second recession which this was backed up by the US’s poor showing on the data front yesterday.

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Written by Tom Tong

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