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A Classic Case Of Risk Aversion

By:
Barry Norman
Published: Feb 9, 2016, 05:57 UTC

This morning’s price action was a text book case of risk aversion. The commodity linked currencies, the Aussie and the kiwi plummeted and the Japanese yen

A Classic Case Of Risk Aversion

Jumping on the Risk Bandwagon Think Again
This morning’s price action was a text book case of risk aversion. The commodity linked currencies, the Aussie and the kiwi plummeted and the Japanese yen soared. On Wall Street, the markets tumbled on Monday the Nasdaq was down nearly 15 percent in 2016. Wall Street, spooked by the crash in oil prices, fell another 3 percent, dropping below $30 a barrel, driving fear that something isn’t right economically.

The Aussie fell 0.72% down by 51 points to 0.7037 while the kiwi gave up 35 points to trade at 0.6593. The yen jumped to its highest level against the dollar since late 2014 as a bloodbath on equity markets stoked investor demand for safe assets. In Tokyo, the greenback dropped below 115 yen as Japan’s Nikkei 225 stock index dived almost 5% following a rout in US and European bourses fueled by worries about the global economy.

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World markets have suffered a tumultuous start to 2016, hit by a slowdown in the world economy, particularly key growth driver China, and plunging oil prices. The woes have led traders to rush into safe assets such as the yen and gold to protect themselves from the uncertainty and turmoil. The yield on Japanese government bonds – considered a rock-solid investment – also sank to zero for the first time in history on Tuesday.

The dollar dropped to 114.72 yen at one point on Tuesday, from 115.86 yen on Monday in New York, while the euro weakened to 128.74 yen from 129.67 yen.

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“What a panic situation,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. “European funds have been selling dollar-yen since this morning, and it broke through the barrier options around 115.”

Three-month dollar/yen implied volatility – an indicator of how much currency movement is expected over the coming months – jumped as high as 12.137 percent on Tuesday, its highest since September 2013, as the yen soared in spot foreign exchange trading.

With many Asian markets closed for the Lunar New Year holiday, thin conditions might have amplified trading moves, market participants said. Most markets in the region will re-open from Wednesday, with Chinese markets returning next week.

The euro rose to $1.1220 from $1.1193, as deepening economic woes cast doubt on the chances that the Federal Reserve will raise interest rates again next month. A rate hike tends to boost the currency as it spurs demand for dollar-denominated assets.

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“The yen by default looks to be the safest” currency, Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, told Bloomberg News. “Soft US data is raising speculation that the pace of rate increases will be slow.”

The greenback tumbled to 15-month low against the Japanese yen as the declining oil prices raised market demand for safe-haven currencies. Oil prices extended losses on Monday, with the U.S. crude settling below $30 a barrel again, as market expected the global supplies to exceed the demand.

The yen, one of the major safe-haven assets, rose nearly 1 percent to its highest level against the greenback since November 2014. The dollar index, which measures the greenback against six major peers, was down 0.38 percent at 96.667 in late trading.

With no major data came out Monday, investors were also digesting the closely-watched nonfarm payroll issued Friday.

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