Evidence of risk reversal in the currency markets see haven flows benefit

Tom Tong20/Sep/2012Currency Updates

GBP

Yesterday morning’s Bank of England minutes suggested that the recent easing bias of the UK’s monetary policy may be set to continue. Talk of ‘subdued and uncertain’ growth suggest that the nine-man committee feels that Britain’s flailing economy will require further assistance sooner rather than later. It looks likely, in spite of the committee’s prediction that UK inflation will recede at a slower pace than had previously been anticipated, that November’s policy meeting will bring another hefty tranche of Quantitative Easing for the UK. Sterling is likely to struggle to break significantly higher against any of the other majors, with the potential exception of the euro, in coming weeks whilst the dark cloud of further QE looms over the UK. Sterling dipped against the dollar falling 0.2%, as investor appetite to take on risk eased slightly driven by the decline in EURUSD and some took profits on the pound’s recent rally to a 4-1/2 month high. The minutes showed some policymakers thought the UK economy would probably need more stimulus, keeping alive speculation the BoE could extend its 375 billion pound asset purchase programme in November.

EUR

The spotlight has somewhat shifted from the Eurozone following last weeks US QE, however gloomy news looks like it is set to make a return today as Spain’s public finances will come under close scrutiny, with the latest auction of Spanish long term government debt. As recently as two years ago, most Spanish gilts were held by foreign investors. The latest estimates are that only 30% of Spanish bills are currently retained by sovereign wealth funds and foreign governments. The market for the troubled Iberian state’s bills appears to be dwindling – if this afternoon’s debt sale confirms this, then the single currency may come under renewed selling pressure. The Euro clawed back earlier losses that had been sustained after eurozone construction output slowed in July, and ended the day 0.1% up against the greenback. However, yesterday showed the first signs that evidence of a risk reversal in the currency markets is building and in the coming days this could produce a series of heavy market swings.

This morning, we have seen the euro fall off against the dollar and the pound as risk sentiment has taken a large hit following poor manufacturing data from China, and trade data from Japan showing exports to have fallen.

USD

Crude oil’s incredible tumble these past couple of sessions adds weight to the retracements we’ve already seen in AUDUSD and EURUSD earlier this week. However, these individual pieces have so far fallen short of the overwhelming influence necessary to produce the serious breaks that would usher EURUSD below current levels.

The Greenback is starting to claw back losses from QE3 as profit taking and risk adverse trading starts to take control of the markets. One key movement in the dollar, particularly this morning is the fact that China’s manufacturing survey confirmed the country’s manufacturing output continues to slow, coupled with poor data highlighting Japan’s struggling export market, causing the dollar to hoover up safe haven flows.

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Written by Tom Tong

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