U.S. Dollar Benefits From Risk Aversion, Japanese Yen Rallies To 15-Year High

Talking Points

• Japanese Yen: Hits 15-Year High Against Greenback
• Pound: Home Loans Slip To Five-Month Low
• Euro: Germany Expands At Record Pace
• U.S. Dollar: Existing Home Sales on Tap

Meanwhile, European Union Commissioner for Economic and Monetary Affairs Olli Rehn said that there is a “gradual stabilization in market sentiment toward Greece” as the region takes unprecedented steps to manage its public finances, and went onto say that the efforts “should lay the ground for an eventual orderly return to market access” according to an article in the Wall Street Journal.

Moreover, Mr. Rehn supported implementing additional commercial bank stress tests during an interview with Bloomberg Television and said that it is a “very useful instrument of reinforcing confidence for transparency and sound and solid analysts,” but went onto say that the slower pace of growth in the U.S. and Asian could weigh on the global recovery. Nevertheless, the final 2Q GDP reading for Germany confirmed economic activity expanded 2.2% from the first-three months of the year to mark the fastest pace of growth on record, led by a surge in exports and business investments, while the annualized rate increased 3.7% from the previous year amid an initial forecast for a 1.6% rise in the growth rate. At the same time, industrial new orders for the Euro-Zone jumped 2.5% in June, which exceeded forecasts for a 1.5% rise, and the expansion in economic activity may continue to gather pace throughout the second-half of the year as the region benefits from the rise in global trade. As a result, the European Central Bank is likely to hold an improved outlook for the economy and may look to increase its growth forecast over the coming months, but the austerity measures taken on by the governments operating on the single-currency is likely to weigh on the recovery as they tighten fiscal policy in an effort to reduce the budget deficit.

The British Pound slipped to a low of 1.5372 as investors continued to scale back their appetite for risk, but the GBP/USD appears to be finding intraday support ahead of the 50-Day SMA at 1.5352 as price action bounces back to hold above 1.5400 just ahead of the U.S. trade. However, as the U.S. dollar benefits from the rise in risk aversion, the exchange rate may continue to push lower throughout the day, which could lead to a break below the 50-Day SMA and would expose the 100-Day SMA at 1.5124. Meanwhile, a report the British Bankers’ Association showed loans for home purchases in the U.K. slipped to five-month low of 33,698 in July from a revised 34,575, which was slightly weaker than the 34,000 projected by market participants, and the Bank of England is likely to support the economy throughout the second-half of 2010 as households and businesses continue to face tightening credit conditions.

The greenback continued to advance against most of its major counterparts, while the USD/JPY slipped to a 15-year low of 84.14 as the Japanese Yen rallied across the board, and the low-yielding currency may appreciate further in the North American trade as equity futures foreshadow a lower open for the U.S. market. At the same time, economists are forecasting existing home sales in the world’s largest economy to fall 13.4% in July to an annualized pace of 4.65M from 5.37M in the previous month, and the data could fuel the rise in risk aversion as investors maintain a cautious outlook for global growth.

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To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

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