Most Major Currencies Continue Tracking Stock Market Price Action
Major Currencies vs. US Dollar (% change)
31 Aug 2011 – 07 Sep 2011
- EUR: Debt Crisis Still in Focus as Policymakers Scramble for Solution
- GBP: Bank of England Rate Decision Likely to be Another Non-Event
- JPY: Intervention Fears Keep Yen Separated from Macro-Level Themes
- CAD, AUD, NZD: Risk Sentiment Trends Continue to Dictate Direction
FX markets continue to be driven by broad-based risk sentiment trends, with most major currencies mirroring investors’ expectations for the evolution of the global economic recovery as reflected in benchmark stock indexes. The Japanese Yen continues to be an exception, with links to broad-based macroeconomic trends diminished amid lingering fears of official intervention. Needless to say, the Swiss Franc has also been effectively decoupled from larger themes after the SNB capped the currency at 1.20 per Euro.
Friday’s disappointing US Employment report left the outlook for overall risk appetite broadly uncertain. Traders’ initial reaction was to sell growth-geared assets across the spectrum. However, it seems plausible to think that panic could turn into growing confidence in the likelihood of a Fed action to bolster growth. Complicating matters, investors face an economic calendar that is even busier with high-profile news releases than it has been so far this week. .
Australian and Japanese monetary policy announcements passed with relatively little fanfare, but high-profile rate decisions from Canada, the Euro Zone and the UK still remain. While none of the central banks are actually expected to change policy, their rhetoric will be crucial. Indeed, the market has already begun the re-pricing of interest rate expectations toward a dovish outlook as the recovery shows increasingly apparent signs of exhaustion, and traders will look to the statements accompanying the rate decisions for further guidance. China’s inflation report will also be closely watched for a reading on the pace of future policy-induced slowdown in the world’s number-two economy.
Elsewhere, the Euro Zone debt crisis remains an important consideration. While Germany secured the approval of its high court on the constitutionality of the EFSF bailout fund and its recent expansion, sovereign risk fears continue to linger and markets remain jittery at the sight of the European news flow, leaving the door open for another rout in the single currency and the risk-linked currency space at large. The story has split into a series of parallel narratives taking place across the Euro Zone, with the ascendance of any of them into the spotlight an ever-present threat.
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