In isolation a decline in capital investment in Japan might be seen as further evidence of a nation mired in deep recession. But in light of creeping evidence that global fiscal stimulus is either insufficient or wearing thin, a third monthly decline in machinery orders led investors to abandon bullish plays on pro-cyclical growth currencies and instead favor the yen, which broke to six-week highs against both the dollar and euro. However, yen strength has continued against all the majors today. The ¥94.08 against the dollar and ¥130.42 reading against the euro have not been seen since late May.

07-09-2009 09:40 AM EDTCurrent PricePut Open IntWeekly Change in Put Open IntCall Open IntWeekly Change in Call Open IntPut/Call Open Int Ratio30-day Historical Vol (%)Implied Volatility (%)
Euro  Euro1.395712,56467617,0701,8540.713.512.3
Yen  Yen92.762559,0959218,995-5716.61,334.915.6
Pound  Pound1.621212,6862258,9981551.415.814.0
Canada  Canada0.86224,344-784,046291.114.9N/A
Aussie  Aussie0.78144,37219822,1331,2860.221.318.6
Swiss  Swiss1.08391,515-51,748-30.913.612.0

After a 40% rise off March lows for the world's major equity markets, investors are challenged by the failure of earnings to resume a positive trend fast enough to help feed the rally. As nerves become further frayed more investors are losing trust and turning their backs on stocks, which in turn is creating something of a crescendo as technical analysts point to a break of the 200-day moving average captured at the start of June. A failure here would compound those fears and further convince investors that the global economy is on its way to hell in a hand basket.

Accompanying strength in the yen today sees the dollar retaining its bid, with the dollar index 2.6% off a low coinciding with the burst higher in the S&P in early June. Today the index is at 80.89 and slightly higher on the session. There were some earlier reservations over the dollar as investors fretted over the potential for discussions surfacing as the G8 meeting begins in Italy today. However, those fears are largely manufactured by the media prodding and poking politicians searching for story lines to accompany the meeting. In the grand scheme of things the dollar's ascendancy as a global reserve currency isn't going to change over night.

The British pound continues to lose favor ahead of Thursday's Bank of England meeting. There is some speculation that the Bank will deviate from plan and announce expansion of its asset purchase plans. However, this would smack of panic following weekend rumors carried by one journal. Traditionally the bank prefers to make such changes to plan (we're referring mainly to interest rate changes here) to coincide with its latest quarterly projections, the first opportunity coming in August.

The pound slipped to $1.6048 after an unexpected decline in the Halifax house price index. Investors were braced for a 0.3% rise to boost a 2.5% gain in May, but were shocked to find housing prices declined by 0.5%. To us this is not a bolt out-of-the-blue given the weakness evident in the bank lending data. A rally in home values would have been more of a surprise given ample evidence of weakness. The pound also slipped versus the euro to 86.57 pennies.

An IMF upgrade to 2009 global growth forecasts had a mixed impact on the pro-growth commodity currencies of Canada and Australia today. The Canadian dollar rebounded after the report rising from a seven-week low against the U.S. unit to 86.10 cents. Earlier weakness for the Canadian dollar likely centered on a further decline in the price of crude oil to below $62.00 per barrel for the first time since late May.

Although a weaker overall background for global growth has harmed the prospects for the Canadian dollar, the current impact is muted. The so-called loonie has eased back substantially in recent weeks after words of warning from the Bank of Canada on the matter of how a stronger local dollar would likely oppose the forces driving recovery. The year-to-date gains in the Canadian are just 4.5% after the several consecutive weeks of declines.

The trajectory for the Australian dollar, however, has been more assured. It stands 12% higher against the U.S. dollar in 2009, based mainly of its association with China, where recovery had been strong. The recent growth rethink has investors on the back foot. Tomorrow the government is expected to reveal 20,000 further job losses lifting the unemployment rate to a 6 year high.

The Aussie dollar's role as a pro-cyclical growth unit has been insulated by growing consumer confidence bolstered by government stimulus and an eight month long rise for housing loans. But now, the admission of the Reserve Bank that muted inflationary pressures might yet allow it to reduce interest rates from 3% in coming months is serving to make investors think twice about buying into a growth unit. The Aussie slipped against the dollar to 78.77 U.S. cents today.