G20 Risk Rally Doesn't Last Long

We had a small the respite for investors and traders overnight as we had a pledge to support the global economy from the G20. That Euro showed a tentative rebound off its eight-month low, while the Australian dollar bonds off its lowest level in more than nine months.

The rally didn't last long however and we had the US dollar reclaiming those move against the euro and Auusie. in the common unique the G20 officials cited financial system fragility and heightened downside risks from sovereign stresses among the threats to growth. They pledged to commit to a strong and coordinated international response to address the renew challenges facing the global economy.

The problem of course is did she 20 governments can say what they like but the market is waiting for action before they will be convinced.

Asian Currencies Slide, Emerging Markets Showing Signs of Stress

The concern of a global slowdown a result of the inability of central banks to stem the tide of financial turmoil as well as help prop up macro data has caused a sharp selloff in commodities and industrial metals. What we saw overnights was and the unloading of emerging - market currencies which is a signal that the emerging market will face a slowdown amid weaker global growth prospects.

In fact Asian currencies had their biggest weekly drop since 2008 and it caused the South Korean central bank to warn that it would intervene in the markets on its currency's behalf.

Commodities Bear the Brunt of Sellling

In this environment of risk aversion, and selloff in equities, we've seen gold falling as it is continue to be used as a conduit for raising cash. In other words hedge funds and other financial institutions are closing out profitable gold positions in order to pay margin calls in other asset classes.

Other commodities such as copper show us the concern about the global recovery as it sank 7.3% on Thursday and was off another 8% early on Friday, putting it at a 13-month low. It did pare some of those losses during the European trading session. Copper is one of our best indicators for demand for industrial metals and reflect the markets uncertain see and concern for slowing global demand following a report on global growth by the IMF as well as the concerns about downside risks by the Federal Reserve.

What's Next?

Without coordinated steps by governments around the world, or some program by central banks, the scenario of a no growth global economy has a high probability of coming true. We have priced some of that into equity markets and general financial markets at the beginning of August, and are experiencing the second leg of that now following the failure of the Federal Reserve to convince the market that its step - Operation Twist - will help turn the tide.

Therefore we may be looking at a sustained period of US Dollar strength - similar to 2008 thought not with the same magnitude. Higher-yielding commodity currencies which are linked to global growth prospects - the AUD, NZD, CAD - will continue to be in the crosshairs especially after the very strong moves we've seen the second half of this week.

Both the AUD/USD and USD/CAD moved convincingly through their parity levels breaking key psychological level and setting up a role reversal at parity. It's likely to act as resistance in the case of the AUD/USD and support for USD/CAD.

So far today we look to perhaps extend our gains in the greenback against these commodity currencies before we head into the weekend as we trade at our weekly low in the AUD/USD and weekly high at USD/CAD entering the NY session.

The pound which rebounded overnight alongside with the euro also may have completed a short-term, counter-trend, correction and is falling as we enter the NY trading session. The EUR/USD is already at intra-day lows after having bounce down off the 55 period exponential moving average in the 1-hour timeframe.

Unlike 2008 were we had the bankruptcy of Lehman Brothers to spark a heavy risk off tone that lasted for months, this year we have the Greek default scenario playing a similar role, though the near-term default scenario may be avoided if Greece gets its next installment of aid from the EU and IMF. They have pledged to undertake further reforms in order to secure that aid, and it will be up to the Europeans to pass the agreed-upon reforms from the July 22 summit including expanding the scope of the EFSF. While that may help avoid that potential disastrous event, the markets now are responding more to the possibility of a slowing global recovery.

While it would mean a further move towards safe haven and away from riskier currencies, that move shouldn't be done in a dramatically sharp way, the last three days withstanding.

We'll want to see how market participants digest that events of the second half of this week, as they come back from the weekend and we'll see if we have a continuation of these sharp declines or if valuations give the canny investor the opportunity to buy stocks at low levels helping to stabilize equity markets which should help stabilize things in the currency realm as well.

Nick Nasad
Chief Market Analyst