Risk Aversion Dominant

Risk aversion has returned and recent big winners like the commodity linked Australian and New Zealand dollars have fallen full percentage points in currency markets. Falling stocks in the US, Europe and Asia have pared demand for risky assets. Tokyo’s Nikkei fell 0.5%on Friday and the Standard and Poor’s 500 index posted the biggest one day percentage decline in three weeks. Stuart Bennett of  Calyon stated, “Risk aversion seems to be dominating at the moment and may continue to do so. That said, there hasn’t been much by way of new information to induce a fresh wave of uncertainty.” Many investors have sold shares and bought short term treasuries to minimize losses before years end.

Bank of Japan Says Economy Improving

On Friday the dollar index DXY was up 0.6% at 75.770 .DXY, above the fifteen month low of 74.679 hit last Monday. The dollar rose 0.3% against the euro $1.4862 and against the yen the euro traded at 132.09 yen. The dollar fell 0.9% against the yen and traded at 88.88 yen. The Bank of Japan left rates at 0.1% and a bank policy meeting raised its economic assessment saying the economy is improving. Adam Cole of the Royal Bank of Canada said, “The yen won’t materially sell off until we see a rise in U.S. interest rates.” US Treasury two year note yields fell to the lowest this year as investors remain concerned that the demand for higher yielding assets has outpaced US economic growth prospects.

Trichet Warns Crisis Not Over

Markets failed to react to comments by European Central Bank President Jean-Claude Trichet who said it was too early to say that the recession is over. The Kiwi dollar fell more than 2% on Thursday and the losses were extended on Friday. Against the US dollar the Kiwi traded at $0.7256. Trading is expected to be light next week as Japanese markets close for a national holiday on Monday and US markets will close on Thursday for Thanksgiving.

Investors Cautious

On Thursday the US dollar and the Japanese yen rose in the latest back and forth between risk appetite and risk aversion. Stock market declines sent investors in search of safe haven assets. The euro vs. yen rate dropped more than 1% and recent winners such as the commodity linked Aussie and Kiwi dollars fell. Many analysts see investors as becoming cautious in advance of the year’s end and the perception that recovery may be a long way off. Boris Schlossberg of GFT Forex stated, “We’re running out of gas as far as recovery momentum goes. People have started to take money off the table as we’re getting close to the year-end because they want to make sure they can lock in all the profits they had on the long side.”

Germany Could Face Extended Recession

An economic advisor to the German government said in an interview with Reuters Television that Germany could face a double digit recession in 2010 and 2011 as the government withdraws stimulus measures. Many investors and traders see recent economic data as not living up to expectations and predictions. Steve Barrow of Standard Bank said, “There are some indications of a rise in risk aversion - stocks have come off, and there are slight concerns that a lot of data recently has not been living up to expectations.”

Brazil and South Korea May Limit Money Flows

The euro vs. dollar rate fell 0.5% and the currency traded at $1.4884. Against the yen the dollar fell 0.7% to 88.77 yen. US stocks retreated and investors and traders were concerned by actions by the Brazilian and South Korean governments to limit hot money flows into their economies. The dollar index DXY rose 0.3% to 75.384 after hitting a fifteen month low early in the week. The Aussie dollar hit a two week low and fell 1% against the US dollar to US$0.9202. The Kiwi fell 1.9% to US$0.7319.

G 20 Facts

The G 20 nations are meeting this weekend in St. Andrews Scotland and traders and investors around the globe are watching intently. Even the most oblique reference to currencies will have analysts trying to decipher some hidden meaning that could affect currency exchange rates. The Group of Twenty Finance Ministers and Central Bank Governors or G 20 is a collection of finance ministers and central bankers representing 19 countries plus the European Union. The G 20 economies represent 85% of all global gross national product (GNP), is responsible for 80% of all global trade and represents two thirds of global population. In addition to member nations the G 20 also includes the International Monetary Fund (IMF0, the World Bank, the International Monetary and Financial Committee and the Development Committee of the IMF and World Bank.

G 20 Issues Communique

On November, 7 2009 the G 20 issued a communiqué which did not mention currencies directly. Earlier speculation had predicted that the G 20 would push for Asian nations to allow their currencies to appreciate. The communiqué pointed out that recovery has been uneven and the IMF has warned against pulling stimulus measures too fast. The IMF stated that growth has taken place but warned; “However, the pace of recovery is uneven, particularly in advanced economies, with consumer confidence remaining subdued, the waning of temporary fiscal measures such as the cash for clunkers programme in the U.S. and similar programmes elsewhere is slowing production.”

The IMF Weighs In

In their first communiqué the G 20 reflected the opinion of the IMF and said, “Economic and financial conditions have improved following our coordinated response to the crisis. However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured.

There has been no further word about Asian currencies but the discussion is expected to take place before the meeting adjourns.

Dollar Holds Recent Gains

The US dollar held onto advances in advance of the Federal Reserve meeting. Most analysts expect the Fed to keep interest rates at near zero for the near future but will be watching for language indicating possible shifts in policy. Falls in stock prices on both sides of the Atlantic boosted the dollar as risk sentiment wanes. Banking troubles in the UK ad Euro Zone caused investor concern about the health of the banking system. Shake ups at the Bank of Scotland and Lloyd’s pressured the pound which fell 0.5 percent on the day to $1.6308.

Euro Zone Banking Problems, Gold at Record Highs

In addition to bank troubles in the UK the European Commission said that bank stress tests showed that Euro Zone banks could lose up to 400 billion euros ($590.9 billion USD) in 2009-2010. Gold reached a record high of $1084.70 following news that the International Monetary Fund had sold 200 tons of gold to the India’s central bank. Most analysts do not believe the rise in gold is due to risk aversion trades. The U.S. Dollar Index .DXY gained 0.10% to 76.368.

G 20 to Meet This Weekend

The euro vs. dollar rate was down 0.56% trading at 76.368 and against the Japanese yen the dollar fell 0.03% to 90.30. Investors remain cautious in advance of a slew of economic data due this week. The US jobs report is due on Friday and the G 20 nations meet this weekend in Scotland and currencies are expected to be on the agenda. The Aussie dollar which has been a big winner in currency markets fell 1% after the Australian central bank raised rates for the second month in a row to 3.5%. Andrew Robinson of Saxo Capital Markets stated, “We have a slew of central bank meetings starting today. It’s going to be a bit uncertain and nervous, and under the circumstances a bit of range trading.”