Possible Pandemic Affects Exchange Rates

Currency exchange rates can be affected by a wide variety of factors. Political events, economic news and reports, and even natural disasters can affect currency exchange rates. The recent news of a possible global pandemic of swine influenza has had an effect on currency exchange rates. On Monday the US dollar had fallen against major currencies as risk sentiment among investors increased. Traditionally the US dollar is seen as a safe haven in times of economic trouble as is the Japanese Yen.

Mexican Peso Loses on Pandemic Fears

Swine flu, which first appeared in Mexico, has spread to several other countries with confirmed cases around the globe. The possibility of a pandemic has sent investors flocking to the safe haven of the US dollar affecting forex currency exchange rates including the Euro to Dollar rate. The Mexican Peso has fallen 3% against the dollar because of pandemic fears. An announcement by an ECB official that the bank was ready to use quantitative easing measures put more pressure on the euro to dollar rate.

US Housing Data Triggers Rise in Risk Appetite

On Tuesday risk sentiment rose as data showed that the pace of declining home prices in the US slowed causing many investors to believe that the housing market has hit bottom. Concerns about the health of the US banking sector limited gains by the euro and the yen hit a 7 week high in the yen vs. euro currency exchange rate.

WHO Raises Pandemic Alert

The euro was trading at $1.3051 down 0.3% against the dollar. The euro to dollar exchange rate has been hovering around $1.30 for the past few trading sessions. The World Health Organization raised its pandemic alert from phase 4 to phase 3 affecting global currency exchange rates. The organization did not suggest any travel bans or border closures.

The influenza news is a prefect example of how non economic factors can affect currency exchange rates.

Euro Bolstered by ZEW Report

http://www.interbank-fx.net/2009/04/euros-gains-limited/euro/The euro rose on Tuesday after falling to a one month low on Monday bolstered by a report showing increased German investor sentiment. A recovery in US stock markets also helped the euro dollar exchange rate. The US dollar is up more than 7% against the Euro as forex investors are betting that the US will be the first nation to recover from the global recession.

Gains Limited by Concerns About ECB Actions

The euro to dollar gains were limited by concerns about future ECB policies. The ZEW report which measures German investor confidence posted the first positive results since 2007. In mid day trading the euro dollar exchange rate was $1.2970 after hitting a one month low on Monday of $1.2883. Gains in the euro dollar rate are expected to be limited due to uncertainty about what monetary policies the ECB may or may not adopt. Dustin Reid of RBS Global Banking & Markets, stated, “Mixed signals by the ECB are at best putting a lid on euro gains and at worst, hurting it. Risks remain on the downside for the currency.”

IMF Report Pares Gains

The ECB is widely seen as behind the United States in addressing the recession and credit crunch and this has put pressure on the euro dollar exchange rate. The euro dollar rate was also affected by an IMF report that said that banks must write down $4 trillion in toxic assets before the global economy stabilizes.

Geithner Speaks

U.S. Treasury Secretary Timothy Geithner said that difficulty in placing a value on toxic assets is hindering banks ability to lend and borrow. Many forex traders and investors are concerned about the health of the financial sector and this has placed even more pressure on the euro dollar rate. At present investors are waiting to see just what actions the ECB will take.

Risk Appetite Fades

The recent return of risk appetite which was powered by a rise in stocks gave way to concerns about the banking sector. The Japanese Yen fell to a six month low against the US dollar and the Euro on interbank forex markets. News of the failure of IBM’s takeover of Sun Microsystems and banking concerns signaled a return of risk aversion which benefited the Yen.

Kiwi and Aussie Dollars Fall

The higher yielding Kiwi and Aussie dollars which had benefited from recent risk appetite fell as interbank forex brokers watched for actions by the Australian central bank. The Reserve Bank of Australia is meeting to decide whether to cut rates by 25 to 50 basis points or to keep them at the present record low of 3.25 %.

Investors Seek Safe Haven Positions

As usual, the return of risk aversion benefited the US dollar and the Yen as interbank forex brokers and investors sought safe haven positions. The back and forth between risk appetite and aversion was noted by Toru Umemoto of Barclays Capital who stated, “It’s a tendency since the financial crisis for investors to be risk averse, and they don’t hold positions for a long time. As a result the theme in the market changes every week.”

BOJ Leaves Rates Unchanged

Interbank forex brokers were also paying close attention to actions by the Bank of Japan. The central bank is not expected to change rates which now stand at 0.1%. The bank is also expected to start lending to regional banks which are troubled by the current credit crunch and the worst recession since World War Two. The bank’s actions are not expected to affect the Yen’s safe haven status on interbank forex markets.

Those engaged in forex trading online will be watching interbank forex markets closely. Retail forex markets take their cue from interbank forex markets and stock markets. Since interbank forex brokers have access to proprietary information not available to the general public it is wise to pay close attention to interbank forex exchanges.

G 20 Summit Raises Risk Sentiment

Markets react quickly to world events and the interbank forex market is no exception. Last week’s actions by the G 20 summit in London caused a rise in risk sentiment despite dismal employment figures from the United States. Probably the most important action taken by the G 20 nations was the decision to provide massive sums of money to the International Monetary Fund and the World Bank.

Pressure on Dollar and Yen

Despite the demands for increased regulation the US eased balance sheet rules for banks. Financial markets and interbank forex markets reacted positively to G 20 actions. The rise in risk sentiment put pressure on the US dollar and Japanese Yen on interbank forex markets. The European Central Bank made rate cuts that were less than expected. The ECB also did not announce any unconventional measures such as quantitative easing. Interbank lending rates for three month dollar and Euro funds held steady despite the small rate cuts.

$1.1 Trillion Stimulus Package

Risk aversion declined in both financial and interbank currency markets after the G 20 leaders agreed to provide a $1.1 trillion dollar package to stimulate the global economy. The G 20 leaders also agreed to increased regulations on banks, hedge funds, and tax havens. The Japanese Yen fell on interbank forex markets and Japan is expected to announce a $100 billion dollar stimulus package late this week.

Cooperation Between Central Banks

Some analysts believe that government actions may not help the banking sector as much as expected and expect banking troubles to continue. Despite the naysayers the US Federal Reserve Bank is cooperating with the Swiss National Bank, the Bank of England, Bank of Japan, and the European Central Bank to get foreign currencies to US financial institutions.

What happens in interbank forex markets is usually a precursor for what will happen in the retail forex market. If risk sentiment remains high in interbank forex markets the same risk appetite is sure to reverberate throughout global forex markets.

G 20 and ECB Meet This Week

This week is sure to be a busy one for interbank FX markets. The G 20 summit which has been the target of massive protests throughout Europe is of particular interest to interbank forex brokers. Interbank forex brokers have been cautious this week and are waiting for the results of the G 20 summit and the scheduled European Central Bank meeting. The ECB is expected to cut rates to 1.0% and interbank forex brokers are watching for any indication that the ECB will take unconventional measures such as purchasing government and corporate debt in an attempt to boost the money supply.

US Suffers 742,000 Job Losses

Interbank forex traders took note of a report released in the US by ADP Employer Services that showed a loss of 742,000 private sector jobs in March. Many interbank forex brokers and strategists believe that the report will be followed by even worse figures when the US releases its Non Farm Payrolls report Friday. Brian Kim of UBS stated, “The jobs numbers are pretty bad, but people have settled into accepting that reality. There’s more concern with positioning ahead of the G20 and ECB meetings.”

Euro Most Vulnerable

The Euro is seen by interbank forex strategists as the currency most vulnerable to events surrounding the G 20 and ECB conferences. Interbank forex traders also believe that the current 8.5% unemployment rate in the Euro Zone will put more pressure on the ECB. Melvin Harris of Advanced Currency Markets said, “The unemployment numbers freaked people out a bit, as they may lead (ECB President Jean-Claude) Trichet to be a bit more liberal in terms of moving toward unconventional policy.”

Euro in Today’s Trading

The dollar traded at $1.3220 against the Euro and remained unchanged against the Yen at 98.92 on interbank forex exchanges. The Euro traded at 130.80 Yen. The Pound rose 0.6% against the dollar and traded at $1.4404.

The upcoming G 20 summit and the ECB meeting are bound to have an effect on currency markets. At the present time interbank forex traders are seeking safe haven in advance of both meetings. Despite political differences G 20 participants realize what is at stake and hopefully international cooperation will be the result.