Risk Sensitive Currencies Weaken

Posted April 17, 2009

The conflicting reports on the state of the global recession are leading to investors once again seeking safe haven. The risk sensitive currencies weakened as a result. The Mexican bank reported the GDP will contract more than expected leading to a significant weakening of the peso.


The markets receive good news one day and investor optimism rises, only to slip the next day.  Even the head of the European Central Bank said it is too early and market conditions too unstable to predict what the end of 2009 will look like.  The problem is that the banking industry is still not stabilized despite some companies, such as Goldman Sachs, reporting better earnings than expected for the first quarter of 2009. 

There are still those pesky toxic assets to deal with and overpriced bonds such as those held by Citigroup, Inc.  In the rush to make money over the last week, some market values became overstated, which means a correction is forming.

The currencies that are most risk-sensitive began correcting yesterday.  The market has shown some optimism the last week, but it has been more like taking a break from the gloom of the recession.  Now the reality is beginning to overcome the false optimism. 

Of the major global currencies, the euro, Australian dollar, and Canadian dollar are some of the most sensitive to risk and investor confidence.  Yesterday, all three fell against the US dollar. 

The euro weakened to $1.3171 euro per US dollar.  The Canadian loonie fell to C$1.2093 per US dollar.  The Australian dollar weakened to 71.91 US cents.  The weakening of these risk-sensitive currencies was mostly due to investor profit taking.  The three currencies had advanced too far over the last couple of weeks and are now going through an adjustment.

The senior foreign-exchange trader at the British Columbia currency services firm, Tyson Wright, said it best when he commented on the currency market.  He said, “I would just call it lacklustre.  There’s not a lot that anyone’s getting excited about.”

The euro slid against most other major currencies.  It fell to C$1.5843 against the Canadian dollar.  It also fell to 129.28 yen per euro and the South African rand to 11.6490 rand per euro.

Some of the lacklustre in the currency market is due to investors playing wait-and-see.  They are waiting to see how the European Central Bank plans on dealing with the recession.  It is expected the ECB will begin a policy of quantitative easing but that is not certain at this point.

The Australian and New Zealand dollars fell in response to China’s lagging GDP predictions.  The Aussie fell to 71.82 yen on fears the global recession is going to continue deepening.  The New Zealand dollar also fell to 5682 yen.

The UK has seen some signs of life in its housing market, but the pound weakened against the US dollar.  It fell to $1.4925 pound per US dollar.  The UK pound strengthened against the euro to 88.02 pence per euro.

The Mexican peso lost its weekly gain when the Banco de Mexico announced the GDP contraction would be more than expected.  The bank cut the benchmark interest rate to 6.00 percent after a .75 percent cut.   The peso fell to 13.1205 pesos per US dollar.  The US recession has played havoc with the Mexican economy since Mexico is so export dependent.  Mexico also has to pour scarce resources into its battle with the drug cartels.

It is interesting to note, once again, the impossibility at this point of predicting the markets.  As long as the recession continues to produce signs it could deepen, there will not be market stability.  The most recent equity market rally in the US will probably not last, simply because the forces of growth are missing.  The Wall Street Journal writer, David Gaffe, summed it up neatly when he wrote, “….rallies tend not to stick until a number of factors are moving in a positive direction.  Those include economic indicators, earnings expectations, valuation, investor sentiment, and the characteristics of the market’s decline in the first place.” (WSJ, 17-April-2009, p. C7)

“Characteristics” include those toxic assets which are still not resolved.