US Dollar Diversification Even Apparent in Safe Haven Enviornment
The recovery in the currency markets was certainly not to be unexpected on Monday following a bout of significant USD buying in the previous week.
We had warned of the strong possibility for some form of initial USD selling, with the markets needing to consolidate the latest moves before considering the next up-leg in favor of the Greenback. Whether or not this USD selling persists through Tuesday trade is still very much in question, however, we would not expect the USD selling to last much longer, with weekly technical signals warning of a major USD bottom and fundamentals also aligning on the back of an escalation in risk aversion and uncertainty over the outlook for the global economy. Markets have once again been reacting less to any specific data and more to the pressing concerns over sound economic recovery and stability within the major global economies. The resurfacing of sovereign risk concerns in Ireland has not helped matters and could place additional pressure on currencies in general should a full on Irish restructuring occur.
Elsewhere, there has been a lot of talk of the shared safe haven status between the USD, Yen and Swissie throughout this latest wave of risk selling. Traditionally, the USD has been a prime beneficiary of safe haven flows, and while the Yen is also a major benefactor, to see the Swissie equally benefitting does reflect a potential shift in the way the global economy views the US Dollar. When the USD was selling off sharply in recent years, many cited a major diversification away from the buck and into other currencies in an effort to not be so heavily dependent on USD fluctuations. However, what is even more compelling and fascinating has been the same diversification away from the USD in times of elevated uncertainty and risk aversion. Presumably, not only is there a push to invest in higher yielding alternatives to the USD, but also a push to have attractive alternative safe haveninvestments outside of the buck. This is a scary development for the US Dollar and one that ultimately could eventually knock the Greenback off of its longtime pedestal over the coming years.
There were no surprises from the RBA Minutes and as a result was largely ignored by the market. The minutes showed the central bank opted to leave rates on hold at 4.5% while waiting for more information after core inflation came in slightly lower than expected. On the global economy, the RBA said that was more uncertainty than earlier in the year but they still expected Australian GDP to be above average in 2011 and 2012.
Looking ahead, the Eurozone current account is due out at 8:00GMT, followed by UK CPI (-0.2% expected) and the retail priceindex (0.0% expected) at 8:30GMT. German ZEW (20.0 expected) and Eurozone ZEW (9.3 expected) are the out at 9:00GMT and cap things off for data in the European session of trade.
Written by Joel Kruger and Jonathan Granby
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