Q 2 Reports Affect Currency Trading
Last week currency trading was largely affected by second quarter US corporate earnings reports. The stellar performance of Goldman Sachs, Intel and JP Morgan triggered a slight rise in risk sentiment among investors and currency traders. These results were followed by bad news from General Electric and Bank of America Corp. which dampened hopes of recovery.
‘Difficult Challenges Ahead’
Bank of America, the US’s largest bank. Said that net income fell by 25% during the second quarter and warned of further losses due to troubled loans for credit card, mortgage, and business customers affected by job losses and a weak economy. Bank of America Chief Executive Kenneth Lewis said. “Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010.”
Markets Lack Direction
Currency trading last week was somewhat volatile and many analysts said markets lacked direction. Mixed earnings reports caused investor caution lifting the dollar late in the week. Falling risk sentiment left many currency traders wary of higher yielding currencies like the Aussie dollar. Steven Butler of Toronto-based Scotia Capital said that the Euro’s failure to rise above the $1.41 lever reflected investor anxiety about the economy. Markets ignored euro zone trade data which showed a 1.9 billion euro surplus and also ignored the dollar positive comments by Japan’s top financial diplomat who said that the dollar would remain a core asset in Japan’s foreign currency reserves currently at $1 trillion dollars.
Next Week’s Economic Calendar
Factors likely to influence currency trading this week include June’s leading economic indicators due Monday, the weekly report on U.S. petroleum supplies due Wednesday, and weekly initial jobless claims and June’s existing home sales due Thursday. Speaking about last week Greg Salvaggio of Tempus Consulting said, “This has been a difficult market for forex traders.”
Goldman Sachs and US Retail Sales Figures Boost Risk Appetite
On Tuesday a slight return to risk appetite as investors pondered figured from Goldman Sachs and US retail sales figures. Earnings figures from Goldman Sachs and retail sales figures exceeded expectations giving some modest hopes for recovery from the recession. Many traders and forex investors remained wary ahead of Q2 earnings figures from other US financial institutions.
Euro Pressured by German Data
The rise in risk sentiment benefited the Australian dollar while the euro was pressured by German data. According to a poll by German think tank ZEW German economic sentiment fell for the first time in nine months. Greg Salvaggio of Tempus Consulting stated, “Retail sales were better than expected, so that’s a bit of good news, but there’s been little follow-through as the market is uncertain which way it wants to trade.” Many traders noticed that t a lot of the 0.6% increase in June retail sales was driven by higher gas prices.
Aussie Dollar Up
The higher yielding Aussie dollar rose 0.8% to $0.7889 boosted by high Australian business confidence. The pound rose by 0.4% to $1.6297 bolstered by better than expected home price data and higher retail sales data. The dollar to yen exchange rate rose 0.3% to 93.30 up from 93.15. Better than expected US retail sales data and producer prices put downward pressure on the Yen which has been the chief beneficiary from recent risk aversion.
Some Analysts Say Risk Appetite Not Sustainable
Markets have reacted quickly to any positive data that indicates that recovery is under way. Last week saw increased risk aversion as investors waited for second quarter earnings from US corporations and banks. Forex traders also kept a close watch on the G 8 summit that took place last week. Many currency experts advise caution saying the current Goldman Sachs and US retail sales data are not enough to sustain the current rise in risk appetite.
Economic Optimism Premature
For the last two months forex traders and investors have been reading about the ‘green shoots’ of recovery theory which has affected currency exchange rates. Although many experts warned that the optimism displayed was premature investors searched for signs that the worst of the global recession was over. Recent unemployment data from the US and weak industrial figures from the US combined with poor stock market performance have left doubts about the progress of global recovery.
Risk Aversion Benefits Dollar and Yen
Risk aversion is with us once again and as usual the chief beneficiaries are the US dollar and the Japanese Yen. Fabian Eliasson of Mizuho Corporate Bank stated, “We’ve been getting very mixed signals, with some positive data and some very poor data, so it’s extremely difficult to pinpoint direction. As a result, people are backing out of high-yield assets and into the yen and dollar. Now, the focus will turn to corporate earnings as the main driver for the market.”
Yen Big Winner
The biggest winner in the return to risk aversion has been the Japanese Yen. On Tuesday the dollar to yen exchange rate fell 0.6% to 94.72 while the euro to yen rate fell 1.1% to 131.81. The pound to dollar rate fell 0.9% to $1.6119 due to weak industrial output data from the UK. Forex traders and investors are awaiting second-quarter U.S. corporate earnings which will be released in the next few weeks. Poor results will affect currency exchange rates and drive demand for the dollar and yen.
Focus on G 8 Summit
Investors are also watching the G 8 summit taking place this week in Italy. China and Russia are expected to force discussion of the dollar’s status as a reserve currency. Both nations have expressed a desire to replace the dollar as a reserve currency. For now forex investors will be closely watching the G 8 summit and waiting for US Q 2 corporate earnings.
