Stock markets plunged yesterday after global growth prospects were downgraded, investors flocked to the ‘safe haven’ currencies and the Dollar gained 3 cents against the Euro and another 3 cents against the pound. Interestingly the Dollar didn’t fare as well against the Japanese Yen where it hit a 15-year low, prompting Japanese policymakers to voice concern about the currency’s strength.
High yielding currencies such as the Australian and New Zealand dollars suffered during the flight to safety, commodity prices also dropped following news of a surprisingly large U.S. trade deficit and a downgrade of Britain’s growth forecast by the Bank of England.
The U.S. trade gap widened 18.8 percent in June, suggesting second-quarter economic growth was weaker than previously anticipated. The report follows the Federal Reserve’s gloomier economic outlook published this week and data from China confirming its rapid growth was slowing due to its reliance upon the American economy for factory orders and overall growth.
Sterling did rise against the Euro yesterday due in part to the liquidity of the EUR/USD cross, as traders desperately tried to find pile back into the USD they chose the path of least resistance which was the EUR/USD trade. This helped the pound to gain against the Euro as it was a victim of its own success. “The euro sell-off we’ve seen this week has been down to concerns about the peripheral euro zone economies, but I think that move is temporary and the strength of the recovery in Germany is more important for the euro,” said Jane Foley research director of Forex.com.
The Antipodean economies remain fragile due to their reliance on global growth coupled with some bad data as New Zealand’s Manufacturing sector shrank for the first in 11 months in July and fading demand from China only allowed Australia to add an extra 23,500 jobs in July which was only marginally better than the 20,000 expected figure.
With commodity prices slowing down and their high inflation rates these two could see their values lose the luster they have developed over the past few months but whether the beleaguered pound will be able to rise to the occasion and post higher rates has yet to be seen.
Global markets have regained a semblance of composure today but as risk aversion dominates its worth watching the stock markets to see where the speculators are heading. Very little data out today but the American market might well add fuel to the flames again this afternoon.