Forex Go!

This morning the markets are starting out clearly in risk aversion mode as there is a sense of fear of retaliation from Al Qaeda due to the killing of their leader Osama Bin Laden. However, it looks as though everything is lower, including the price of oil and gold which given the risk in the market may not make sense.

For if the risk in the marketplace is due to a potential retaliatory strike, wouldn’t that increase the price of oil, and not the other way around? Something to think about.

Overnight, the RBA in Australia left interest rates unchanged at 4.75% but issued mildly hawkish comments with regard to inflation, though the market has discounted this and is more concerned with the risk we are seeing.

Both the Euro and Pound are lower, but the Pound is particularly weak as PMI data came in at 7-month lows. While both the ECB and the BOE are giving their rate decisions on Thursday, the ECB will issue and accompanying statement whereas the BOE will not.

This could create divergence between the two currencies as there may be more weight of clarity given to the Euro. Both Central banks are not expected to raise rates.

Friday’s Non-Farm Payrolls report here in the US will round out the week and may set the tone for the month ahead.

So stocks and commodities are lower, as are the risk currencies with Dollar and Yen higher.

In the forex market:

Aussie : The Aussie is mostly lower on risk aversion as the RBA left rates unchanged to no one’s surprise. Mildly hawkish comments by the RBA have been discounted.

Kiwi : The Kiwi is lower for the same reasons as Aussie as the flight to safety trade is out-weighing yield-seeking today. Employment figures due out tomorrow will give a better clue as to how the economy is faring in New Zealand.

Loonie : The Loonie is also down as oil prices have retreated to just under $112. Lost in the shuffle is the Canadian employment report due out on Friday and yesterday’s election of a conservative majority may mean both tax and budget reform.

Euro : The Euro is mostly lower despite in-line PPI data that was reported. The anti-Dollar properties are in full-effect this morning as risk-aversion is driving the action today.

Pound : The Pound is the worst performer this morning as PMI data came in at 7-month lows, showing a reading of 54.6 vs. an expectation of 57. This comes ahead of the BOE rate policy decision on Thursday that is expected to produce no change in policy, and data releases such as this may support that view.

Dollar : The Dollar is stronger this morning as risk aversion is causing a bit of the flight to safety trade as foreign currencies were at extreme levels vs. USD. The big news this week for the US is Friday’s NFP report, with lesser important placed on Wednesday’s ISM Non-manufacturing report.

Yen : The Yen is stronger across the board as carry-trades are reversed. There is no news of significance for Japan this week so the Yen will continue to trade on risk themes. A stronger Yen is undesirable at this point due to the recovery efforts so if Yen should continue to strengthen vs. USD, then we could see some action by the BOJ.

When markets begin to hit extreme levels, I always am on the lookout for the catalyst that could potentially reverse trends. While last week no one could have predicted this amazing development with the Killing of Bin Laden, I had a sense that something had to give.

To be honest, I was focused on the Royal Wedding where the potential for a risk event was obviously heightened.

So we have to look at both recent events as giving the people of sense of hope, in the face of seemingly dire economic conditions. For last Friday, UK citizens were able to forget about the 4% inflation they are seeing; and here in the US the euphoria over the Bin Laden killing occupies the minds of the people.

Not to be a complete skeptic, but these recent events are really nothing more than diversions that capture our attention for a while. The BOE will not change policy in the UK on Thursday, banking on the goodwill of the last week’s celebration to buy them more time for economic recovery.

So with heightened risk in the marketplace due to the potential for retaliation, the currency market will back away from extremes for a bit until policy comes back into focus.

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