Risk Appetite/Aversion a See Saw Act

Lately risk appetite and risk aversion have been performing a see saw act. One week its risk aversion, the next, returning risk appetite. Obviously a return to risk appetite will provide investors with more Forex opportunity than risk aversion. Traditionally the US dollar and the Japanese Yen benefit from risk aversion as investors seek a safe haven from uncertain and volatile markets. Currency strategist Matthew Strauss had this to say about changing risk appetite, “

Japan’s action earlier in the day had contributed to some risk-taking, but investors are still cautious. I wouldn’t put too much into today’s lower risk aversion, because risk appetite can change overnight.”

Higher Yielding Currencies Benefit

On Tuesday a modest increase in risk appetite benefited some higher yielding currencies such as the New Zealand and Australian Dollars as investors took advantage of Forex investment opportunity caused by a global rise in stock markets. All eyes are on the newly confirmed Treasury Secretary Timothy Geithner. Investors are hoping Geithner will move quickly to address the worst economic downturn in decades.

Japan Rescues Troubled Companies

The Japanese government launched a $16.7 billion dollar plan to buy shares in many troubled companies affected by the economic downturn. The move heightened risk appetite and sent investors to the Forex opportunities offered by higher yielding currencies. The Nikkei exchange rose almost 5% during the day on Tuesday. Matthew Strauss, currency strategist at RBC Capital Markets, stated, “We’re seeing a slight increase in risk appetite as most stock markets have risen and therefore we’re seeing dollar/yen gain a little bit.”

Euro Posts Slight Gains

The Euro rose for the first time in weeks and many short term investors took advantage of the Forex opportunity offer by the slight gain. Gains are expected to be short lived as data from the Euro Zone continues to be troubling. Investors will be watching for developments coming out of the Federal Reserve meeting which begins Wednesday and is expected to last two days. Any actions taken by the Fed are bound to affect currency markets and the Forex opportunity they provide.

Euro in Serious Trouble

Ever since the Euro was launched in 1999 many believed that, in time, the Euro would rival the US dollar for a global reserve currency. The Euro has provided many traders and investors with many Forex opportunities since its inception. The Euro seemed poised to weather the recent economic crisis but recent data from the Euro Zone reveal a currency in trouble.

Euro Zone Economy to Contract

The Euro is faltering as the global economic crisis takes its toll on the currency and the Forex opportunities it provided seem a thing of the past. The economy of the 16-nation Euro Zone is expected to contract by 1.9 percent this year while the US economy is set to shrink by 1.5%. Many economists are expressing doubts about the currency’

s long term prospects. There is even talk of some member states quitting the Euro Zone completely.

Greece May Defualt

The immediate outlook for the Euro Zone is dismal at best. Many member states are in real financial trouble. Many predict a sovereign debt default in Greece which would require an International Monetary Fund style bailout by fellow members with harsh conditions that would jeopardize the country’s fragile political balance. Greece has amassed debts equivalent to 90% of its gross domestic product. All this has had an adverse effect on the forex investment opportunity the Euro once provided.

EU Slow To Address Crisis

The European Union’s response to the global financial crisis has been seen as behind the curve. In contrast to the United States whose Federal Reserve Bank and Treasury Department quickly moved to address the crisis, the EU and the European Central Bank have been seen as sluggish in taking action. EU members have doled out stimulus packages seen as too little too late. The Euro is under extreme pressure on currency markets and at present it’

s potential for Forex opportunities are almost nonexistent.

Economic uncertainties explain the fact that the Euro has a share of foreign-exchange reserves half as large as the US dollar. Investors are attracted to the fact that in the United States a single government agency sets fiscal policy and that U.S. bond markets are much larger and provide investors with more Forex opportunities.

EU Population Stagnant

On unnoticed factor that gives the United States an edge is the fact that the population in the US is expected to rise by at least 20 percent by 2050 while the population in the Euro Zone is stagnating. Holger Schmieding, chief economist for Europe at Bank of America in London stated, “If you have the choice between two similar economies, the one that’s growing faster on trend than the other will have the edge.” If the Euro is to survive and provide Forex opportunities it will need prudent management and more young consumers.

Pound at 23 Year Low Against the Dollar

The British fell further on Thursday after reaching a 23 year low against the US dollar amid fears that the UK is heading for a severe financial crisis. The pound briefly fell more than 2%during Thursdays trading, hovering above $1.3620 and offered little Forex opportunity. UK stock markets remained volatile after suffering major losses earlier in the week. Many believe that another government bailout plan may not be enough to save the banking sector.

UK Financial Sector Under Immense Strain

Recently released figures showed a decline in UK factory orders and a drop in automobile production prompting a selloff of the beleaguered Pound. Many believe that Bank of England will have to do more than cut interest rates to rescue the economy. The Pound continued to suffer from risk aversion and limited Forex opportunities. Lee Hardman, currency analyst at BTM UFJ in London stated, “The major theme in the UK is the financial sector, which is still under immense strain. The market is taking the view that nationalization of at least part of the UK banking sector is almost inevitable and this is weighing on sterling.”

Pound May Fall Further

The fall follows the news that the Bank of Scotland posted the largest financial losses in British history which has weighed heavily on the British financial sector. Many expect the Pound to fall to $1.32-1.30 against the US dollar before recovering. Since the beginning of this week the Pound has fallen 7% its biggest weekly fall since late October. The Pound has declined by 30% since July, 2008 when the Pound bought $2.00. Investors are selling the Pound and taking advantage of the Forex opportunities offered by other currencies.

Bank Of Scotland Posts Record Losses

The losses posted by the Bank of Scotland highlighted the dire condition of the British financial industry. Many believe that further government intervention is necessary. Bank of England Governor Mervyn King said that policymakers need to consider new ways to stimulate the economy such as buying assets as interest rates, already slashed to 1.5%, are headed towards zero.

Dollar and Yen Still Strong

While the Pound continues to fall the US dollar and the Japanese Yen continue to perform strongly and still offer Forex opportunities to savvy investors. Both the European Union and the UK now realize that the global recession is more severe than was once thought. Hopefully both the EU and the UK will take the actions necessary to bring about recovery.

No ‘Obama Bounce’ in Markets

Many investors were expecting what has been called the ‘Obama bounce’ in markets. Instead the S&P fell to an inauguration day record. Actually, based on 5 decades of data the Dow fell more often than it rose on Inauguration Day. Since by and large Forex markets follow equity markets there has been a slide in major currency pairs and limited Forex opportunity.

Dollar Declines Against Yen

The dollar has risen against the Euro and British pound but it has declined against the Japanese Yen. The dollars performance reflects a flight to safety and does not reflect optimism but pessimism. Newly elected Obama inherits an economy in shambles and many think that the first 100 days of a new administration can define a presidency. Obama is expected to announce many reforms and new monetary policies that can either increase or decrease Forex opportunities.

History On Obama’s Side

Historically Stocks rose in the first 100 days of a President’s term 11 out of 16 times. Political party doesn’t really matter but of the 5 times that equities dropped in the first 100 days, 4 out of the 5 were during Republican Presidencies. The good news is that although Obama has been handed a dismal economy, history is on his side and many economists expect to be celebrating a stronger stock market after the first 100 days of his presidency. Currency markets will most likely follow suit resulting in increased Forex opportunity.

World’s Eyes on Obama

The global economic news has not been good and the world’s eyes are on Obama and the United States which is seen as very proactive in addressing the global recession. In contrast the Euro Zone and the UK are seen as behind the curve in taking necessary action to stem the growing Euro Zone recession. In his inauguration address Obama state, “Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.”

Obama Administration to Make Economy First Priority

It is a given that the Obama administration will make the economy their first priority. A strong US economy is necessary for the function of the global economy. A smoothly functioning global economy translates into increased Forex opportunities for investors. At present all eyes are on Obama and the new administration.

Yen Falls

The Yen fell on Monday as rising stock markets helped to promote risk appetite and sent many investors in search of Forex opportunities offered by higher yielding currencies. Trade in the US was subdued due to the Martin Luther King national holiday. Concerns about the troubled US financial sector receded reducing demand for safe haven currencies such as the US dollar and the Japanese Yen.

Analysts Cautious About Sustainability of Gains

Some analysts stated the Forex market was cautious about the sustainability of gains in share prices and remain cautious about the global economy. Yousuke Hosokawa, treasury department senior manager at Chuo Mitsui Trust and Banking Co. stated, “The currency market lacks direction and is moving within limited ranges. Gains in U.S. shares were within the range of rebounds and the U.S. financial sector still faces difficult times.” The return of risk appetite is providing short term Forex opportunities for many investors.

Bank of America and CitiGroup Report Losses

Both Bank of America and Citigroup both reported multibillion dollar quarterly losses on Friday. CitiGroup indicated they would split into two operating units. Despite massive Government intervention, many investors remain wary of the fate of Citigroup and the US financial sector in general.

Many Forex traders remained on the sidelines in anticipation of Obama’s inauguration on Tuesday. The incoming administration’

s monetary policies will affect available Forex opportunities and currency markets globally.

Dollar and Euro Rise

The dollar rose 0.4% from late New York trade on Friday to 91.03 Yen while the euro climbed 0.7% 121.50 Yen, and climbed by 0.3 % to $1.3348. The dollar index was down 0.7% at 83.587. Investors took advantage of Forex opportunities offered by higher-yielding currencies such as the Australian and New Zealand dollars which are seen as a measure of risk appetite. The Australian Dollar rose 0.8% to $0.6786 and against the yen was up 0.4% t at 61.78 Yen. The New Zealand dollar rose 0.6% to $0.5511 and 0.2% to 50.15 Yen.

New Administration, New Policies

A new administration takes the reins pf power in Washington Tuesday and will most likely make the economy a very high priority. Just how those unannounced policies will affect markets and Forex opportunities remains to be seen.

Risk Aversion Returns

The Euro fell to a one month low against the Yen as risk aversion returned and the currency was pressured further on expectations that the European Central Bank would lower rates later in the week. Market shares were down after the release of data that showed that the US, the world’

s largest economy, lost over a million jobs in the last two months of 2008.

Yen Offers Safe Haven

Investors took advantage of the safe haven and Forex opportunities offered by the Japanese Yen sending the Yen to a 3-week high against the dollar. Both the Yen and the dollar are seen as safe havens in troubled economic times and offer investors Forex opportunities as well.

Dollar at 3 Week Low Against Yen

The U.S. dollar also tumbled to a 3-week low against the yen at 89.62 yen. The British Pound fell further against the dollar by 1.3% to the $1.50 mark. The Pound is viewed as a high risk currency offering minimal Forex opportunity. The beleaguered Pound fell further against the Yen to 134.34. IdeaGlobal strategist Maurice Pomery said, “I still see the yen attracting a lot of safe haven money and equities look like we may take another look at the lows soon.”

Grim Euro Zone News

Data released last week showed factory output collapsing across Europe increasing the prospect for a sharp economic downturn and increasing expectations for a large rate cut when the European Central Bank meets to decide policy on Thursday.

IMF Speaks

International Monetary Fund Managing Director Dominique Strauss-Kahn said in a media interview on Monday that Europe was “behind the curve” regarding economic stimulus measures and said he expected the ECB to cut rates further. Many economists expect ECB to cut key interest rates by 50 basis points to 2.0 percent. Some expected a 75 basis point cut while others expected a one percentage point move. Lee Hardman., currency economist at BTM-UFJ stated, “Going into the meeting, the euro will be under pressure as the market expects the ECB will cut … with economic data arguing in favor of aggressive easing.”

Despite the dismal state of the global economy, Forex trading still offers investors opportunities that other markets cannot match. Forex opportunities are abundant in today’

s currency markets and savvy, educated, traders will always be able to realize a profit in this dynamic market.

Job Losses Not As Bad As Expected

The US dollar rallied in Fridays trading following a jobs report with data that was not as bad as originally thought. Data in the report showed that job losses were not as bad as had been feared. It was originally thought that about 550,000 jobs had been lost and many investors breathed a sigh of relief when the report showed job losses of 524,000.

Return to Risk Aversion

At present it looks as though the dollar will continue to provide investors with a safe haven and Forex opportunity. Many analysts see a return to risk aversion which will help the dollar and Yen due to their reputations as safe havens in times of economic crisis. Despite 12 straight months of job losses and weak economic data the dollar continues to provide Forex opportunities for traders and investors.

Euro Zone Economy Deteriorating

The already beleaguered Euro fell further after data revealed a deteriorating Euro Zone economy. Data showed a bigger-than-expected drop in French industrial production which put more pressure on the Euro. The Euro received little support from an unexpected rise in euro zone retail sales and consumer demand in the Euro Zone remains weak.

Yen Makes Gains

Another currency that has been helped by the global financial crisis is the Japanese Yen. Like the dollar the Yen provides Forex opportunities and is seen as a safe haven currency. In Mondays trading the Yen reached a one-month high against the Euro. Heightened risk aversion boosted demand for the low-yielding yen, as well as the U.S. dollar, as investors rushed towards safer assets. Currency economist Lee Hardman stated, “The U.S. payrolls numbers were pretty dreadful and helped underline fears that the U.S. labor market is undergoing a severe deterioration, knocking market confidence and helping to fuel yen gains.”

All Eyes on European Central Bank

Many Forex traders will be watching the European Central Bank which is expected to aggressively cut rates later in the week. Hopefully the move will stimulate European markets and provide even more Forex opportunity for investors.

Dollar Makes Sharp Gains

On Monday the US dollar made sharp gains against the Euro and the Japanese Yen prompted by the stimulus plan announced by the incoming Obama administration and the anticipated cuts by Central banks. Investors were pleased by the Forex opportunities offered by the new administrations plans to institute a proposed stimulus package that could be worth up to $775 billion. The Obama administration is also seeking $310 billion in tax cuts.

Fed and Treasury Pro Active Addressing Crisis

Ron Simpson, director of currency research at Action Economics had this to say, “The combination of tax cuts, infrastructure spending and job creation under the Obama stimulus package takes out some of the pain from the economic recession we’re in. The Federal Reserve and U.S. Treasury are being pro-active in dealing with this crisis. I think at some juncture, the U.S. efforts would turn the economy around quicker than many of the other countries and that should be dollar-positive.â€

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Yen at Three Week Low

The Yen fell to three week lows as risk appetite and Forex opportunity returns amid hopes for global economic recovery and stock market gains. Some analysts believe that the Euro’s recent gains were too fast given the dismal state of the Euro Zone economy. Against the yen, the dollar climbed to 93.56 yen its highest since December 8. The Japanese currency gained 19% in 2008 as investors sold assets financed with the Yen’

s cheap rates and took advantage of the Forex opportunities offered by the Yen.

ECB Says More Rate Cuts Needed

The Euro fell after ECB Vice President Lucas Papademos said that more rate cuts may be needed to shield the Euro Zone from a deeper recession. Previously ECB officials have resisted aggressive rate cuts. Figures released Monday showed consumer price growth slowing in December and similar Spanish data showed inflation tumbled to a 10-year low. These figures are putting pressure on the Central Bank to cut rates further.

Many expect the costs of borrowing to fall sharply to 1.75%. Tightening conditions may prompt the ECB to cut rates more aggressively than expected and may also cause a drop in the Euro Dollar rate. Hopefully these moves will create more Forex opportunity for both traders and investors.

Investors Sell Euros

The US dollar gained early in 2009 as investors sold Euros after data showed a deepening recession in the Euro Zone. Forex investors and traders also realized that the Euros gains in November were unsustainable. Low trading volumes during the holidays also affected currency markets and the Forex opportunities they normally provide. Dustin Reid, director of Forex strategy at RBS Global Banking & Markets stated, “Indeed markets are thin as many are opting to take today off. “As a consequence, we will not likely see full liquidity back into markets until next week or possibly even the week after.”

Eurozone Manufacturing at 11 Year Low

Euro Zone manufacturing activity fell to an eleven year low which was well below market forecasts. Recently investors have taken advantage of the Forex opportunities offered by the Euro as the US Federal Reserve cut interest rates to near zero, while the European Central Bank has adopted a more gradual approach to cutting interest rates.

Daragh Maher, currency strategist at Calyon in London stated, “Currency markets will struggle to balance the Euro’s upside from interest rates not being cut aggressively with the concern that the economy is destined for a sharp deterioration on the back of this measured policy reaction.”

Pound Falls Further

The Pound fell after data revealed a dismal image of the economy in the UK. Recently the Pound had cone close to parity with the troubled Euro. British mortgage approvals fell to record lows in November and a survey conducted by the Bank of England said that credit conditions will tighten over the next three months. Home prices also declined 2.2% in December.

Dollar Still Offers Safe Haven

Many investors are once again taking advantage of the Forex opportunities and safe haven offered by the US dollar. Market activity is traditionally slow during the holiday season and it is expected that markets will return to normal activity this week.