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Does Yen Rally Signal The End of Risk?

Last updated 3/30/2009 3:53 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Yen’s 200+ point rally against the greenback tonight suggests that currency markets may be in for rough ride this week as risk aversion hits stocks and high beta currencies come under renewed selling pressure. News that the Obama administration is entertaining the possibility of a GM bankruptcy and has asked Rick Wagoner to step down from his post as chairman, sent Asian markets tumbling on fresh concerns over the possible economic fallout from such a move.

After several weeks of positive price action in equities which spurred renewed appetite for high yield currencies like the  Aussie and the kiwi, the start of this week’s trade looks decidedly grim as investors come to the sobering realization that the global economic contraction may not have yet reached a bottom. Investor sentiment is also soured by the evident disagreement between the principal players ahead of the G-20 meeting in London this week. With Europeans lead by Germany’s Angela Merkel refusing to commit to further fiscal stimulus, the prospects of an essentially empty G-20 meeting are likely to weigh on the currency market as well. Finally, the looming US Non-Farm payrolls report which is projected to record -650K jobs lost is yet another fear factor driving risk appetite from the market.

In short, after a few sunny weeks of hope that saw equities rebound  more than 20% off their lows, gloom and doom are back in play with the dollar and the yen once again attracting the lion’s share of the flow.  Whether this is a resumption of the bear market in both equities and risk currencies remains to be seen, with G 20 likely the key determinant of price action this week. If the member nations do not produce any meaningful communiqué on coordinated policy action, risk aversion will only intensify and much of the gains from the carry trade rally in the past two weeks will  evaporate.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.