This morning is marked by major risk-aversion in the forex market in an extension of Friday’s sell-off. News over the weekend has sent investors running for the safety of the US dollar and Japanese yen as carry trades are un-wound. What’s causing this fear to heat up?
Well, in addition to the usual Greece rumblings and UK election concerns, the major news of the weekend is: Goldman Sachs. On Friday, the SEC charged Goldman Sachs (one of the world’s most prestigious investment banks) with fraud. What is amazing is that just on last Thursday, I mentioned in this blog article that Goldman Sachs was upgrading its outlook for the Canadian dollar and how I saw that as a bad thing for the Loonie as my experience has taught me to do the opposite of what Goldman Sachs says. Sometimes a trader’s intuition is more important than all of the charts and research combined. I don’t take solace in that call.
Also, the volcano in Iceland preventing travel is causing financial duress.
Nevertheless, the commodity currencies are lower, as are stocks and commodities world-wide. Whether or not Goldman is guilty of wrong-doing will be answered in due course, but for now the market is selling and will ask questions later.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk-aversion as well as reports that Chinese Yuan re-valuation may cause Australia to slow the pace of its interest rate hikes. If Chinese demand cools, than the Australian economy will be affected by decreased exports. There is now talk in the market that the RBA may have raised rates too quickly, as home loan approvals have fallen for 5 straight months.
Loonie (CAD): As I mentioned last Thursday, while I still have a rosy outlook for the Canadian economy, doing the opposite of what Goldman says is one of my rules to live by. The Loonie is lower this morning as commodities are lower, with oil leading the way down 2.5% to $81. There is also news that the BOC may announce this week at its rate policy meetings that it will begin raising rates in June, rather than starting in July but in larger increments. Tomorrow is the interest-rate statement, and Thursday is the monetary policy report.
Kiwi (NZD): The Kiwi is actually higher this morning despite the risk-aversion in the market, as the Performance of Service Index rose to its highest levels in almost 2 years. A surge in hiring drove the this reading higher, which come a day in advance to the NZ Consumer Price Index which is due out tomorrow in the overnight session. Analysts are predicting a .6% rise after a .2% contraction last quarter.
Euro (EUR): A volcano eruption in Iceland from last week is still causing a major log-jam to commerce as flights have been canceled in Europe since last week. However, it is the other volcano waiting to erupt– namely Greece and the rest of the PIIGS countries that have sovereign debt issues that may be the bigger story. Germany’s bonds are now starting to take a hit as their role in the backing of Greece is starting to call their credit-worthiness in to question.
Pound (GBP): The pound is lower once again as concerns over political gridlock due to the May 6th elections are putting pressure on the Pound. This comes on the heels of a report that showed that house prices have advanced 2.6%, the fastest pace in 3 years. This precedes Wednesday’s BOE policy meeting minutes which are expected to show a dovish stance on rates.
Dollar (USD): The Dollar is higher on the flight to safety trade due to risk aversion. The Goldman news could send shockwaves through the market, especially if other firms are hit with similar charges. Thursday marks the big day of news for the US economy, as PPI, home sales, and initial jobless claims are due. Expect the dollar to trade on risk themes and inversely to stocks and commodities this week.
Yen (JPY): The Yen is higher this morning as the un-wind of carry trades due to risk aversion is creating demand for Yen. In addition, Asian stock markets were down overnight, and the Yen will often times trade inversely to the Asian stock markets, much like how the US stock markets and dollar trade. Adding to yen strength is the news that consumer confidence figures came in at their highest levels in almost 3 years as Japan is benefiting from its export-led economic rebound.
As you can see, all it takes is a little bit of risk-aversion to send the markets into a frenzy. While economic figures have been improving world-wide, none of this matters if fear of loss outweighs potential gains in the market.
Global recovery is still on very fragile terms, despite what media and government types may try to have you believe. This Goldman news could be the first of many dominoes that fall as the truth comes to light about what really happened with the housing market, credit derivatives, and just overall greed.
In the meantime, if the various volcanoes, both real and metaphorical, don’t subside soon, Europe could be in real trouble economically.
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