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Risk Aversion Dominates on Japanese Meltdown

14 March 2011

Global stock markets have slumped as investors become increasingly risk averse. The stock market in Tokyo has fallen by the greatest amount since 2008 and oil has been pulled back under $100 a barrel as speculators guess that production from the world’s second largest economy will slow and demand for oil will slow driving oil prices further south. The Nikkei 225 Stock average declined 6.2% with $306Bn wiped from Japanese equities markets. The S&P 500 and the Dow have followed suit losing over 1% as concerns over the fallout in Japan send a rift through the market.

Risk sensitive currencies such as the safe haven Swiss Franc have benefited in trade today. The GBP/CHF pair reached 1.4883 in trade this afternoon and the GBP/EUR pair hit lows of 1.15 in trade this morning. The Euro has benefited from the risk averse environment yet has also gained on news that leaders have agreed to expand the region’s rescue fund.

The Bank of Japan has pumped a record $15 trillion Yen into the financial system in an attempt to shield their financial system from an ongoing fallout this week. It is likely that problems will persist as the actual damage is appreciated on a daily basis.
A number of US companies including General Electric (GE) have suffered ill fate as countries such as China and India are forced to rethink plans for atomic energy, amid safety concerns generated by recent media images.

The currency markets are very much affected by these events and risk appetite is likely to dominate movements in all risk sensitive pairs. The outlook for the week ahead is more uncertain than usual with a busy economic schedule due for release.

Markets will pay close attention to the Fed’s policy meeting tomorrow. Despite the improved outlook for the US economy in Q1 this year we would expect cautious optimism and no indication of any changes to interest rate policy at least until the end of 2011. From the US we also have Industrial Production, Manufacturing ISM and CPI figures to contribute towards price action.

The Euro is unlikely to gain further as the re-emergence of sovereign debt risk is expected to weigh on the single currency. The Euro has started to weaken in trade this afternoon and traders will now focus on comments from finance ministers this week and the employment report. We would hold a contrarian view on the Euro and expect the GBP/EUR to trend back towards the 30DMA in the 1.17’s.

The main point of interest ahead of the BoE minutes and the budget on the 23rd March 2011 is Wednesday’s Labour market report and DCLG house price figures.

If you have a currency requirement and would like to discuss the markets please don’t hesitate to contact me.
Best Regards
Luke Zorab

Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”

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