Both the September Japanese Yen and September Euro were in the spotlight on Friday. Both are being affected by the same news but both are moving in opposite directions versus the Dollar.
The central theme driving investors out of the Euro is risk aversion. Speculation that the global economic recovery is stalling is leading investors to shun higher priced assets and move to lower-yielding currencies. This speculation is encouraging the selling of the Euro while triggering buying interest in the U.S. Dollar and the Japanese Yen. This was apparent today when a drop in U.S. consumer sentiment weakened the stock market and the Euro while pushing up the Yen.
Heavy selling pressure in the global equity markets is leading investors to believe that an economic recovery in 2009 and early 2010 is highly unlikely. This is encouraging longer-term traders to reallocate money into the U.S. Dollar and eventually into the U.S. Treasury markets. Furthermore, Japanese Yen investors are pulling their money out of global equity markets and bringing their money back home despite receiving literally no return on capital. This move by the Japanese investor is a clear sign that return of capital is more important than return on capital at this time.
All eyes are on the U.S. Treasury markets at this time. Despite a two day setback following the completion of a 50% retracement of the entire March to June decline, money is still leaving the equity markets and looking for a place to go. This is leading to speculation that there will be another flight-to-safety rally in the September Treasury Bonds and Treasury Notes. Start to watch for new support to be established in the Treasuries especially if equity markets get hit hard.
The equity markets seemed poised to move lower. Each rally we have seen this week have been met with selling pressure. Better than expected earnings from Alcoa earlier in the week could not jump start the Dow which is the weakest of the three major indices. Talk that there will be less spending on technology is beginning to take its toll on the stronger NASDAQ market. In between is the September E-mini S&P 500 market which is in a position to take out a key bottom at 872.00. The bigger picture is beginning to indicate that this market is well on its way to correcting down to at least 810.00.
