The US dollar and Japanese yen surged at the start of trading on Sunday, as the release of the Group of Seven's (G7) statement and Japanese GDP results spurred yet another bout of risk aversion in the forex markets. The G7 was highly bearish on the global economy, saying that severe slowdown will linger on throughout the year, which worked to the benefit of the safe haven US dollar.
• US Dollar, Japanese Yen Gain as G7 Statement, Japanese GDP Spur Demand for Safe Havens
• British Pound Ends Day Lower as BOE's Bean Signals Buying of Government of Debt
• Euro Holds to Key Ranges, Bank of Greece Governor Says ECB Can't Buy Government Bonds
• Commodity Dollars Tumble on Risk Aversion, Australian Dollar Faces RBA Meeting Minutes Overnight
US Dollar, Japanese Yen Gain as G7 Statement, Japanese GDP Spur Demand for Safe Havens
The US dollar and Japanese yen surged at the start of trading on Sunday, as the release of the Group of Seven's (G7) statement and Japanese GDP results spurred yet another bout of risk aversion in the forex markets. The G7 was highly bearish on the global economy, saying that severe slowdown will linger on throughout the year, which worked to the benefit of the safe haven US dollar. Meanwhile, without hawkish comments on volatility in the currency markets, the Japanese yen was able to rally further as traders judge that there is little risk that the Japanese government will step in to intervene physically. Adding to concerns about the health of the world's economies, Japanese GDP fell more than expected in Q4 by 3.3 percent from the previous quarter and by a whopping 12.7 percent from a year earlier, the most since 1974. The trade-dependent economy has been hurt badly by the decline in European, US, and Asian demand, as exports fell a record 13.9 percent from the previous quarter. Furthermore, stagnant wage growth and climbing job losses have left no room for discretionary income to grow, and thus, private consumption has also contracted. Overall, the outlook remains particularly bleak for Japan, as a recovery there is contingent upon recoveries in the economies of their major trading partners.
Looking ahead to Tuesday, conditions in the US manufacturing sector are expected to have deteriorated further in February as the New York Fed's Empire index is forecasted to dip to -24.0 from -22.2. The breakdown of the report is likely to follow similar trends to what we've seen over the past 6 months: declining prices, persistent contractions in new orders, and signs of additional layoffs. This release doesn't tend to be a huge market-mover, though disappointing results have the potential to exacerbate any risk averse selling going on in the markets.
British Pound Ends Day Lower as BOE's Bean Signals Buying of Government of Debt
The British pound ended Monday mixed against the majors, falling versus the US dollar, Japanese yen, and Swiss franc while gaining against the Australian dollar and New Zealand dollar. Overall, though, the currency remains in consolidation mode and looking at GBP/USD in particular, either a break above 1.5000 or a drop below 1.4150 will be needed before we can cite a true directional move. Meanwhile, comments by Bank of England Deputy Governor Charles Bean highlighted the bleak outlook for the UK economy, as he said that the central bank would probably have to expand the range of assets purchased under the scheme to include government debt since the Monetary Policy Committee is running out of room for further cuts. By buying up governing debt, the BOE could theoretically bring down yields, which automatically creates some downside risks for the British pound in the long-term. Bearish potential for the currency also looms in the near-term as UK Consumer Price Index (CPI) is forecasted to have fallen negative for the fourth straight month in January at a rate of -1.0 percent, which could drag the annual rate down to a 10 month low of 2.7 percent from 3.1 percent. Such a decline would be important because it would put inflation back into the BOE's preferred range of 1 percent - 3 percent and closer to their target of 2 percent. If CPI falls more than expected, the British pound is likely to drop as the markets will increase speculation of a cut to the Bank Rate on March 5. On the other hand, if the annual rate of CPI growth holds above 3 percent, the currency could gain on expectations that the BOE will leave rates unchanged.
Related Article: British Pound Weekly Trading Forecast
Euro Holds to Key Ranges, Bank of Greece Governor Says ECB Can't Buy Government Bonds
The euro slumped against the greenback on Sunday and Monday as risk aversion in the markets favored the latter currency. However, the euro held up against British pound despite news last week that Euro-zone GDP fell a record 1.5 percent in Q4, as Bank of Greece Governor George Provopoulos said that the European Central Bank (ECB) hasn't talked about buying government bonds, suggested interest rates in the region will remain high relative to the UK. Provopoulos said that the purchases might constitute as direct monetary finance of fiscal deficits, which isn't allowed by the ECB's rules, and that each member country was responsible for resolving its own fiscal difficulties. That said, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that last week's price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.30/31.
Related Article: Euro Weekly Trading Forecast
Commodity Dollars Tumble on Risk Aversion, Australian Dollar Faces RBA Meeting Minutes Overnight
Commodity currencies like the Canadian dollar, New Zealand dollar, and Australian dollar all fell against the greenback and Japanese yen amidst lingering risk aversion. Meanwhile, the Australian dollar will face scheduled event risk overnight. After the RBA cut their cash rate target in line with expectations by 100 basis points to 3.25 percent on February 2, the bank's Statement on Monetary Policy suggested that they would leave rates steady going forward as the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad. However, Credit Suisse overnight index swaps are still pricing in a 50 basis point cut to 2.75 percent on March 2, so if the minutes from the meeting reflect a neutral stance once again, the Australian dollar could gain as the markets would accommodative for the shift. On the other hand, if comments contained in the minutes suggest that the Monetary Policy Board still sees the need for more accommodative monetary policy, the currency could pull back further.
**For a full list of upcoming event risk and past releases, go to the DailyFX Calendar.
Written by: Terri Belkas, Currency Strategist for DailyFX.com