Posted April 26, 2009
The yen and US dollar strengthened as investors sought safe haven as the swine flu spreads from Mexico into the United States and Canada. The Mexcian peso weakened against the US dollar as the recession weary country now deals with the expectation of additional reduced revenues from tourism and recreational activities.
It seems the world is under attack when you consider markets are now responding to the news the swine flu is posing a health risk around the world. The confirmed cases are currently in Mexico, the United States and Canada, but the virus is just beginning to spread so there are expectations a much larger number of flu victims can be expected.
The Mexican peso is weakening as the origins of the flu are determined to be in that country. A country battling a recession must now confront a deadly virus that has already claimed the lives of 81 Mexican people. The government will have to divert scarce resources into dealing with the public health threat. In addition, the flu epidemic is sure to negatively impact tourism and business leading to reduced revenues at hotels, restaurants, night clubs and other public places.
The peso has weakened to 13.57818 against the US dollar and could decline further.
The yen and dollar gained as the flu spread though. When investors get nervous about the economy, they turn to safe haven assets. News of the flu has created investor nervousness that was increased when the US Director of Homeland Security and the World Health organisation officially announced a “public health emergency of international concern”.
The yen rose against the US dollar to 96.87 yen. It also strengthened against the Australian dollar (69.40 yen) and the New Zealand dollar (54.82 yen). Investors seeking refuge drove the yen up against the US dollar for the fourth day straight. Also strengthening the yen was the announcement by the Director of the White House National Economic council, Laurence Summers, that the US “economy will continue to decline” for most of 2009 before beginning a turnaround.
The dollar strengthened against the New Zealand dollar to 56.58 US cents. It also rose against the Australian dollar to 71.63 US cents.
When paired with the euro, the yen rose to 127.89 yen per euro, as did the US dollar to $1.3194 dollars per euro. The next European Central Bank policy meeting is 7-May-2009, and there is a possibility the benchmark interest rate will be lowered once again and a policy of quantitative easing introduced. The current interest rate is 1.25 percent and one ECB member recommended going below 1 percent.
Also expected to cut their benchmark interest rate is New Zealand. The prediction is the rate will be reduced to 2.5 percent and that would represent a 50 basis point cut. A reduction in the interest rate will also reduce the appeal of the currency as a higher yielding investment.
Also in the currency news recently has been the South African rand. The rand increased to 8.7150 rand per US dollar. It also strengthened against the euro to 11.5402 rand per euro.
The rise in the rand is largely due to the election win of the African National Congress. The continuation of the ANC will most likely mean unchanging economic policy and that is seen as a positive. South Africa has a stunning 21.9 percent unemployment rate.