Euro and Yen Capitalize as Risk Aversion Sweeps Financial Markets

The Euro and the Japanese Yen continued to build on last week’s strength as risk aversion swept across the financial markets, triggering the unwinding of carry trades.

Talking Points:

• Kiwi Dollar Under performs as RBNZ Compounds Pressure from Risk Trends
• Euro Joins Japanese Yen in Capitalizing on Sharp Carry Trade Liquidation
•  See Economic Releases Directly on Your Charts with the Daily FX News App

The Australian, Canadian and New Zealand Dollars under performed in overnight trade as risk aversion continued to sweep financial markets, weighing on the sentiment-geared currencies. The Kiwi suffered out sized losses after RBNZ Deputy Governor Spencer reiterated that interest rates are “off the table” as a measure for dealing with the buoyant housing market.

New Zealand central bank officials have repeatedly stated that they prefer macro-prudential tools to the cash rate as a way to reign in runaway property costs. This means that fears of stoking further froth in real estate will not necessarily discourage the central bank from further easing. Indeed, the markets are pricing in an 88 percent probability of a 25 basis point cut at the RBNZ’s meeting next month.

The Japanese Yen proved strongest on the session, rising as much as 1.4 percent on average against its top counterparts. The move appeared to reflect the unwinding of carry trades funded in terms of the perennially low-yielding currency.

The Euro continued to mirror Yen dynamics, reinforcing the suspicion that the ECB’s commitment to long-lasting QE has encouraged the single currency’s transition into a carry funding vehicle in its own right. Tellingly, while the Yen scored gains in excess of a percentage point against most of the majors, EURJPY spent most of the day oscillating in a choppy range.

Looking ahead, the absence of meaningful event risk in European and US trading hours suggests that little stands in the way of continuation for overnight moves. S&P 500 index futures are trading down over 2 percent ahead of the opening bell on Wall Street, bolstering the case for continued risk aversion.