Recently the Dollar has been the poster boy for risk aversion but as equities fell yesterday, to lows on a par with ‘Black Thursday’ two weeks ago the money wasn’t going into the Dollar – rather the Yen more probably. On Thursday the greenback stalled and fell suffering its worst loss in 9 months – even if it was from a 14 month high. It ended the day down against the Euro at 1.2486 and up against the Pound at 1.4365. Economic figures suffered their first shockingly poor result for weeks with jobless claims climbing much higher than expected from 446,000 to 471,000 - when a drop to 440,000 had been anticipated. Another important release, consumer inflation data, also showed a surprising drop, for the first time in 13 months while both annual figures (core and headline) unexpectedly slowed. Apparently, this is the slowest pace of price growth since 1966. This data points to an unfavourable reality which traders will have to face once risk aversion flows cease – if indeed they have not already done so and the bare fundamentals are held up to scrutiny.

   There was an article on the front page of the times on Thursday with a picture of the German Chancellor Angela Merkel and a story that this might be the end of the Euro. When the mainstream press begin to run front page stories about the end of currencies it is often a sign that the opposite will happen – look at the front pages of newspapers and magazines last autumn when the Dollar was at rock bottom, a whole series of articles ran about how this might be the ‘end of the Dollar’. Well, now look at the Dollar. It is one of the best examples of a contrarian sentiment indicator. On Thursday it worked rather well as the Euro actually gained against its main rival the Dollar, closing up from the dangerous lows of the beginning of the week at 1.2487. Economic data was thin and mixed with German PPI up slightly more than expected but Euro zone consumer confidence down slightly more than expected, but neither figures shook the markets exactly. There is still concern about the sovereign debt crisis and rumours circulated about the possibility of government intervention to stop the slide, but China is the only real country with the financial reserves – 300 trillion or so – to be the daddy. Meanwhile investors are sceptical about the trillion Dollar European Stabilization Fund with many asking how much real substance there is behind it.

   The Pound sank to a 4-day low against the Dollar on Thursday. It closed at 1.4365 against the Dollar and reached lows of 126.71 against the Yen. It even sank against the Euro to end the day at 0.8693. Investors are now viewing the Pound as an even riskier bet than the Euro because whilst steps are being seen to be taken to deal with the Euro such as the European Stabilization Fund there is still uncertainty surrounding the former. Until some tangible progress is made with the deficit or the economy rebalances itself, it is difficult to see how Sterling can strengthen. The conviction of the BOE to maintain low interest rates despite growing CPI has also placed Sterling under pressure. On the 22nd June Chancellor George Osborne will deliver his emergency budget and this may see the beginning of some movement to stabilize the Pound although it remains to be seen whether it will have the desired effect.

   The Yen is fattening up like a goose on the risky financial situation of half the rest of the world. Today, yet again it gained as equity markets sank the world over. It closed at 89.67 against the Dollar and the Euro pair reached lows of an amazing 109.45. Economic figures continue to show some fundamental strength pushing through despite the huge debt and exports are still strong which are the economic mainstay of the country notwithstanding the strongest Yen in years. Nevertheless the rating agencies are still stoking rumours of a possible downgrade and asking for a ‘decisive fiscal plan’ - soon it may be a distinct possibility. Debt is astronomical currently at 200% of GDP, but day in and day out fearful investors turn their backs on riskier assets and plump for the safe haven of the Yen. Exports have not yet been affected but if the trend continues there must be an impact, and this must be a fear of the custodians of Japan’s economy.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst