Weaker equities fan risk aversion, boosting yen
The yen strengthened on Tuesday as softer equity markets signalled a return to risk aversion for nervous markets ahead of a flurry of U.S. data, leading investors to unwind carry trade positions.
The high yielding New Zealand dollar fell 1 percent versus the yen as investors moved out of carry trades, in which they borrow low yielding currencies to fund purchases of higher return assets.
European bourses eased and U.S. stock futures pointed to a weak start on Wall Street after a three-day weekend as investors remained wary about the health of the U.S. economy following recent turbulence caused by problems in the housing market.
“We might see a second wave of yen strength over the next couple of days (due to) slightly weaker equity markets and we think there will be some more news on the subprime,” said Marcus Hettinger, Global FX Strategist at Credit Suisse in Zurich.
“We have a lot of economic indicators this week and people are still risk averse, which should be positive for low yielding currencies like the yen.”
By 1125 GMT the euro was down two thirds of a percent versus the yen at 156.80
Dollar steady ahead of busy US data week
The dollar was steady ahead of a data-filled week that is likely to provide investors with some key insights into the early economic effects of the market turmoil.
The key US economic indicator this week is Friday’s payrolls report for August. However, before then investors will be interested in the latest ISM surveys into the manufacturing and services sectors as well as the US Federal Reserve’s Beige Book compilation of anecdotal economic reports from its regional banks.
‘It is crunch time for markets this week as European investors weigh up the consequences of some prime US data and key interest rate decisions in Europe over the next few days,’ said David Brown, chief European economist at Bear Stearns (nyse: BSC - news - people ).
Even though Fed chairman Ben Bernanke and US President George Bush managed to ease some concerns at the end of last week about the economic impact of the subprime crisis, risk aversion remains the dominant force in the markets with investors still looking for reassurance from central bankers and some solid economic data before pursuing riskier trades.
‘The key thing is that credit market conditions remain pretty tight,’ said Neil Mackinnon, chief economist at ECU Group.
‘The credit backdrop is the persistent theme, which in the currency markets means a safe haven bid for the dollar and upside for yen as investors unwind carry trades as risk aversion rises,’ he added.
Away from the US, the European Central Bank will be at the forefront of market attention. Because the central bank is now expected to keep its key refi rate on hold on Thursday at 4.00 pct in light of the tensions in the financial markets, more interest will centre on the subsequent press conference from its president Jean-Claude Trichet.
‘One unfortunate slip of the tongue and Trichet could provoke a massive volatility backlash,’ said Bear Stearns’ Brown.
The Bank of England also delivers its latest interest rate decision on Thursday and is also tipped to keep its benchmark rate unchanged at 5.75 pct, especially as three-month interbank rates hit a near nine-year high yesterday.
The London interbank offered rate (Libor) for three-month sterling reached 6.74 pct, its highest since the Long Term Capital Management hedge fund crash in December 1998.
The BoE, which has hardly said a word about the financial market instability, is coming under more and more criticism for its failure to provide liquidity in the market in the way the Fed and the ECB and its gagging of banks using its back-up lending facility.
‘Relations between the BoE and the banking community are becoming strained,’ said ECU Group’s Mackinnon.
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