Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Financial Markets Giving Key Clues on Currency Trends

Currencies / Forex Trading Jul 12, 2009 - 03:37 PM GMT

By: Money_and_Markets

Currencies

Best Financial Markets Analysis ArticleBryan Rich writes: The financial markets have been highly inter-related since the current crisis unleashed fear and uncertainty starting in late 2007. And investors around the world went running for the doors … out of risky assets and into safety.


So when we want to find clues about the direction of currencies in this market environment, we just need to take a look at what’s happening in stocks and commodities.

Both of these markets have rolled over. And the relief rally of the past four months appears to have run its course.

As a result, currencies like the euro, the Australian dollar, the British pound and emerging market currencies have started their fall as well.

My chart below shows the tight relationship that currencies have had with stocks and commodities over the past 12 months …

Correlations of Currencies to Stocks and Commodities.

The reason these market relationships remain tight is because all of the risks that drove these “crisis correlations” still loom:

  • The housing market is still a major problem with no relief in sight.
  • The same financial system that was staring into the abyss of total collapse because it was buried under billions of dollars in toxic assets is still the not-so-proud owner of those toxic assets.

Now …

  • 6.8 million Americans are out of work,
  • Another 18 million are underemployed,
  • And those who have jobs are working fewer hours.

These conditions make a recovery in consumption an unlikely achievement, which makes recovery forecasts very vulnerable to disappointment.

And officials, though promoting estimates for a recovery in 2010, are hedging themselves with public warnings saying …

Beware of “Downside Risks”

The Organisation for Economic Co-operation and Development (OECD) stated: Substantial downside risks remain, especially if global risk appetite were to falter.

The World Bank declared that: The world economy remains unusually uncertain.

The International Monetary Fund (IMF) said: The forces pulling the economy up are still weak.

And the G-8 reported that it was: Premature to reverse world economic stimulus.

The bottom line: The global economy is mired by risks that could easily divert recovery and send things into further depths of contraction. That means risk aversion is, and will be, the overwhelming theme in markets, which makes the risk-taking interest of recent months merely opportunism.

With this said, the below table shows what you can expect from the currency markets for the foreseeable future …

As this table suggests, when crisis strikes, investors flee global stocks, foreign direct investments, and foreign bonds in favor of the safety of U.S. dollar-denominated assets.

In fact, that’s exactly what happened when the financial crisis kicked off and it became clear that the rest of the world would suffer from the reverberations of the bursting U.S. housing bubble, and the subsequent financial crisis.

However, this trend gradually retraced over the past four months … optimism about the prospects for recovery gained momentum and so did risk appetite.

Now, Risk Aversion Is Coming Back …

Stocks are breaking down again. The S&P 500 is down 9 percent in just 18 trading days. Crude oil has fallen nearly 20 percent in six trading days.

The commodities rally looks exhausted, too. China went on a stimulus-package-induced commodities binge. China’s imports of iron ore in May were the highest on record dating back to 1999. But now that’s subsiding.

The Baltic Dry Index, a good gauge of global demand, has been falling for seven straight days.

What about currencies?

Dollar alternatives don’t exist, particularly in a highly fragile global economic recession.
Dollar alternatives don’t exist, particularly in a highly fragile global economic recession.

As expected, currencies are following suit to the downside. The euro, the pound and the Australian dollar have all breached key technical support and are now in decline. And higher risk carry trades, funded by the favored Japanese yen, are being reversed aggressively.

As for emerging market currencies, this week the Russian ruble experienced its biggest fall in five months. The last time the ruble was falling at this rate, the Russian central bank was in the process of exhausting 220 billion dollars in foreign exchange reserves to defend the value of the ruble.

So with risk aversion picking up, the U.S. dollar’s “least ugly” status comes back into focus, and the dollar benefits.

And despite all of the debate about the future of its reserve currency status, viable dollar alternatives don’t exist. Particularly in a highly fragile global economic recession.

I repeat: The U.S. dollar’s reserve currency status remains healthy. The share of dollars in global foreign exchange reserves increased to 65 percent in the first quarter of this year, the highest since 2007. And the Federal Reserve’s custodial holdings of U.S. Treasuries for foreigners don’t show any signs of slowing.

Correlations of Currencies to Stocks and Commodities.

Source: Bloomberg

That’s not all … on a relative growth basis, the U.S. economy is now expected to lead in a global economic recovery, albeit a weak and fragile recovery scenario.

According to the IMF, in 2009 the U.S. will have among the smallest economic contractions of developed market economies at 2.6 percent. Meanwhile Japan is expected to contract 6 percent, the UK by 4.2 percent and the Euro area by 4.8 percent.

And in 2010, advanced and emerging economies are expected to experience some growth, with one exception … the Eurozone.

The euro has gained 15 percent against the dollar since March. But the relative underperformance of the Eurozone economy makes the euro a likely candidate for another steep fall.

So my suggestion for you today is: Beware of downside risks.

Regards,

Bryan

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in