Risk aversion returned to the foreign currency markets overnight triggered by a sell-off in Asian equity markets. Early today, it was reported that Japan’s economy grew in the second quarter, but the rate was less than expected. Although this news signaled the end of the recession, sellers still felt the need to liquidate long equity positions as the gain did not meet economists’ expectations.
The news regarding the Japanese GDP was the first report of growth in the economy in 5 quarters. It reflected both growing exports and the effects of government stimulus. Traders for the most part ignored the report and instead focused on the breaking stock markets for direction. Many traders are reluctant to commit to a long Yen until the economic numbers prove to be sustainable. It’s one thing to end a recession and another to maintain enough momentum to sustain a recovery.
The Chinese market led the sell-off as investors fled stocks for the safety of lower-yielding currencies such as the U.S. Dollar and Japanese Yen. The Japanese Yen is actually up versus the Dollar as investors repatriate funds removed from U.S. equity markets. Investment firms that borrowed Yen to fund the stock rally are now liquidating their equity positions and buying Yen to payback their loans.
The weekly chart indicates that upside momentum is building which should be enough to regain a key 50% retracement level at 1.0600. If the September Japanese Yen can hold this level then look for a push toward the .618 retracement level at 1.0765.
The September British Pound is also under pressure this morning. This is a combination of technical factors and the news overnight that U.K. home sellers lowered asking prices in August.
The Pound topped out on August 6th following an announcement by the Bank of England that it would expand and extend its quantitative easing program. Since this announcement the Pound has weakened substantially even triggering a bearish closing price reversal top on the weekly chart. The decision by the BoE sent a signal to traders that the U.K. economy was still in bad shape.
The weak economic condition was reaffirmed on August 12th when BoE Governor Mervyn King stated that the global economy was in “deep recession” and that banks may need to raise more capital.
Besides the negative home price news, pressure is also on the British Pound this morning because of risk aversion. The combination of bearish factors this morning has put the Pound in a position to perhaps test a major retracement zone at 1.5372 to 1.4977 over the intermediate term.
U.S. equity futures markets are called sharply lower this morning following a sell-off in Asian markets caused by trader aversion to risk and a Japanese GDP report which showed less growth than estimated.
The stronger Dollar is pressuring December Gold and December Silver. Speculation that weakness in the Chinese economy will trigger less demand for December Copper is also leading to a call for lower prices on the opening.
Traders are pressuring September Crude Oil this morning on concerns that U.S. consumer spending will continue to weaken if unemployment remains high. Traders are anticipating demand for gasoline to fall. Less demand for higher risk assets is also leading traders to sell energy products this morning.
The weakness in the equity markets is triggering a flight to safety rally in the September Bonds and September Notes. Traders also have been buying Treasuries over the past week because of the attractive yields. Last week’s rally in the Treasuries during the auction was also an indication that demand is still there despite the growing deficit and the weaker Dollar this year.
Look for the stronger Dollar to put pressure on the Grains and Softs complexes as traders speculate that foreign demand will drop. November Orange Juice may trade higher if there is evidence that the hurricane hitting Florida will adversely affect the orange juice crop.
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