Aussie and Kiwi Advance For Third Straight Day

For the third straight day both the Aussie and Kiwi dollars advanced against the Japanese yen as demand for safe haven assets fades. A US report that showed industrial production contracting at a slower rate and the stellar second quarter performance of Intel and Goldman Sachs lifted investor risk sentiment reducing demand for the US dollar and the yen. Australia’s 10 year bond yields rose as investors bet that Australia’s central bank will raise rates sometime in the next 12 months. Richard Grace of Commonwealth Bank of Australia stated, “The U.S. economy looks more positive. That’s what the bond market reacted to, and it also helped drive the Aussie higher.”

Reserve Bank of Australia to Raise Rates

The Reserve Bank of Australia is expected to raise its benchmark rates by 64 basis points during the next year and the New Zealand will raise its rates by 78 basis points. Federal Reserve figures showed that in June US industrial production fell by 0.4%, the smallest decrease in eight months. Greg Gibbs, a foreign exchange strategist based in Sydney said, “A sense of greater stability in global markets and a higher yield advantage, following stronger data, may lift the Australian dollar back above 80 (US cents) near term, possibly up to 81.”

New Zealand Economy Recovering Says Prime Minister

The New Zealand dollar strengthened after Prime Minister John Key said that the New Zealand economy is starting to recover from the recession. Citing conversations with Reserve Bank Governor Alan Bollard Prime Minister Key stated, “That tallies with what he’s been privately telling us, that we’re starting to come out of this recession, which is good news. The governor is in a good position to assess both the international markets and the domestic market.”

Euro and Pound Up

The rise in risk appetite has affected global currency exchange rates. The euro traded at $1.41 as investors sought out higher yielding currencies. Sterling rose to $1.6385 from $1.6280. Although some analysts caution that the current rise in risk appetite is not sustainable forex investors seem to think otherwise.

Safe Haven Demand Rising

Both the Japanese yen and the US dollar rose against the euro for the second day due to declining Asian stocks and risk aversion among investors. Rising risk aversion has increased demand for both currencies traditionally seen as safe havens. The London Sunday Times reported that Lloyds Banking Group may post losses of 13 billion pounds ($20.9 billion USD) increasing demand for the safe haven of the yen. Also affecting currency exchange rates was a Wall Street Journal report that said that some major US airlines may have to file for bankruptcy. The report said that American Airlines and Delta may be forced to file Chapter 11 bankruptcy unless liquidity improves.

Asian Stocks Decline

A decline in Asian stocks drove risk aversion higher and the yen traded higher against the 16 most traded currencies. Philip Wee of DBS Group Holdings Ltd. Stated, “Currencies will stay sensitive to downside risks in equities worldwide. Markets may seek safety in the yen and the dollar as they adjust their bullish positions accumulated during the March-June rebound from the crisis.”

Banking Giant Lloyd’s to Post Massive Losses

The pound fell against the dollar after a report in the Sunday Times which said that Lloyds may post losses of 13 billion pounds. ($20.9 billion USD). Yousuke Hosokawa of Chuo Mitsui Trust & Banking Co. stated, “The Times report rekindled concerns about the health of the financial system in Europe, which is believed to have a bigger exposure to non-performing loans than U.S. banks. The risk-averse sentiment will favor the yen.” Last month the European Central Bank said that commercial banks in the euro zone may lose $283 billion by the end of next year as the global recession forces the banks to write off bad loans.

ECB Will Leave Interest Rates in Place

Also affecting Forex markets was a report by the ECB which said that its interest rates are appropriate and that the euro zone economy will recover in 2010. On July 2nd the central bank left its 1% interest rate unchanged in an attempt to stimulate euro zone growth.

Dismal US Unemployment Figures

Recently it seems that the ‘green shoots’ of recovery have withered somewhat after miserable US jobs data sparked a return of risk aversion. For the past two months currency traders have speculated that the worst of the global recession was over despite warnings that the optimism was premature. Last week higher yielding currencies such as the euro and the Aussie dollar which have benefited from the recent optimism fell sharply on Thursday after data showed that the US shed 467,000 jobs in June.

Risk Aversion Dominant

Although the euro to dollar rate recovered somewhat on Friday but risk aversion still dominated currency markets and trading was light during the holiday weekend. Arne Lohmann Rasmussen of Danske Bank in Copenhagen stated, “There has been a bit of a recovery in risk currencies, which got really hammered yesterday. But with the U.S. closed it’s a bit of a dull market today, with everyone taking a breather after yesterday’s hectic movements.”

ECB President Says Euro Zone Economic Activity to Remain Weak

Earlier in the week the euro to dollar exchange rate had risen to a one month high of $1.4200 but fell back to $1.3991 on Friday. Remarks by European Central Bank President Jean-Claude Trichet who said that Euro Zone economic activity would remain weak put additional pressure on the euro. Forex traders are also anticipating the G 8 meeting this week which is bound to affect currency markets.

Risk Appetite Fading

The Japanese Yen benefited from poor stock market performance and advanced against the US dollar and the Euro. Like the US dollar the Yen is seen as a safe haven currency and traditionally benefits from risk aversion. Daragh Maher of Calyon, the investment-banking unit of Credit Agricole SA Stated, “We’re in an environment where risk appetite is fading and the yen in capitalizing. We haven’t had any decisive news to change the pessimistic mood.”

Investors Focus on G 8 Summit

The G8 meeting will likely be the focus of most Forex investors and traders this week  There will in all likelihood be a discussion of the US dollar’s status as a reserve currency which coulkd shake up currency markets.