A slew of negative news drove up demand for the Swiss franc and Japanese yen while the seven-day burst higher for commodity prices came to a sudden end. Investors were forced to rethink their approach to risk as a major investment bank hinted heavily that a stock and commodity correction might be forthcoming. In Japan the government said that the radiation leak continued and raised the safety threat to the highest on the global scale adding that the Fukushima disaster was likely to match the severity of Chernobyl 25 years ago. The pound slumped on welcome inflation news as investors extended the likely length of time the Bank of England will remain on hold while the euro surged to a 15-month high as investors clung on to a 1% cushion over the dollar.
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Japanese yen – The Economics and Fiscal policy minister said that the initial ¥25 trillion damage estimate as a result of the earthquake and tsunami might underestimate the financial damage resulting from the disaster. At the same time Tokyo Electric Power said that radiation was still flowing from the reactor wreckage of its Fukushima power plant. That might cause the disaster to top that of the Russian Chernobyl disaster in 1986. The downgrade to the overall assessment caused panic among investors already hit be a slide in commodity prices after the IMF served warning over the perils from surging energy costs. The yen rose against all 16 of its major trading partners as investors reverted to the age-old philosophy that in times of panic Japanese investors repatriate overseas assets.
U.S. Dollar – The dollar weakened to ¥83.47 overnight before steadying with some investors predicting that the yen might fight its way back to ¥80.00 as a result of the worsening stream of news from Japan. Earlier in Tokyo fresh aftershocks, both of which measured in excess of 6.0 on the Richter scale, shook the country to the north and east of Tokyo. The dollar slid versus the Swiss franc to 90.09 centimes while it has now lost 0.2% against a basket of currencies to stand at 74.91.
Canadian dollar – As the news out of Tokyo came out during the European session, commodity currencies were sold heavily. The Canadian dollar dropped sharply to reach $1.0364 from $1.0438 on Monday as investors ditched growth-sensitive units. The Bank of Canada will likely leave its monetary policy on hold in early Tuesday morning trading, although there are no calls for a tightening and the market has little reason to be disappointed.
Aussie dollar – The Aussie felt the force of an IMF downgrade to global growth in its World Economic Outlook report. Surging energy costs now pose downside risks to growth and have already caused the agency to fade GDP growth in major economies. Asian stocks slumped overnight alongside commodities and Asian dollars. The latter had struck a 13-year high on Monday but the reversal in commodity prices following a Goldman Sachs warning to clients has forced a rethink. The Aussie reached $1.0390 U.S. cents before steadying and last traded at $1.0493. Earlier the unit slid by 2.2% versus the yen before finding its feet to trade at ¥88.36.
British pound – The pound lost a whole cent against the dollar and dipped to a six-month low against the euro following the first reversal in inflationary trends in eight-months. A British Retail Consortium report showed that store sales plunged by the most on record in March and showed a 3.5% year-on-year slump. Consumer prices rose by 0.3% during March and far less than forecast bringing the annual pace of gain down by four-tenths to 4.0%. While sales were falling retailers were busy slashing food prices to maintain store traffic. The result was a 1.4% drop in food costs making it the largest in four years as inflation-struck shoppers conserved lower disposable incomes impacted by a rising government sales tax. Despite the fact that the rate of inflation remains exactly twice the Bank of England’s target, the pound was hit hard as a sea-change in interest rate expectations washed over the money market. The yield curve slumped while expectations for a rate rise were washed out to sea by a further three months to October as the central bank’s decision to leave its policy setting unchanged appeared vilified.
Euro – The euro rampage goes on with the single currency just moments away from reaching $1.4500 where it hasn’t traded since January 2010. Last week’s official rate rise pushes the benchmark yield to 1.25% and easily eclipses by more than one percentage point the daily fed funds rate on the greenback. On a day when risk aversion shot up, it was the euro that surged while investors appeared to overlook the dollar. An EU-wide survey of economic sentiment for April fell from 31.0 to 19.7 but the drop was widely overshadowed by events elsewhere. More worrying for the euro was a dip in German economic sentiment, which according to ZEW slipped from 14.1 to 7.6.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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