Euro Recovers After Volatile Night - The New Safe Haven Bid?

A very volatile night of trade in the currency market that produced lots of heat but little light with EURUSD trading essentially unchanged

[B]Talking Points
• Japanese Yen: breaks below 106.50 as all equities deep in the red
• Euro: Back to breakeven after volatile night
• British Pound: Shows relative strength as fears of cut fade
• US Dollar: Pending Homes on tap[/B]

Euro Recovers After Volatile Night – The New Safe Haven Bid?

A very volatile night of trade in the currency market that produced lots of heat but little light with EURUSD trading essentially unchanged after dropping more than 70 points in early European trade. With global equity markets registering triple digit losses, on fears of further problems in the financial sector, the euro initially sold off but quickly recovered its footing despite lower stocks.

Over the past several days the currency market has seen a complete shift in trading psychology. The EURUSD used to be positively correlated with rising stocks markets, as expanding risk appetite generally favored the carry trade in EURJPY lifting the EURUSD in the process. Yesterday however the dynamic completely changed. Stocks dropped like a stone, yet the euro rallied strongly. Why?

One possible explanation is that the euro is now seen by many investors as the safe haven currency replacing greenback’s long held claim to that title. Although the EZ economy shows signs of a slowdown, on a relative basis growth in the EZ remains much better than in the US with Q1 GDP more than double the US rate. Furthermore with its 4.25% yield the unit stands as an attractive alternative to plummeting equities and certainly a superior choice to the greenback’s paltry 2% yield. This change in correlation therefore bears watching. If this is indeed the new trading theme in FX, further declines in equities may lead to more gains for the EURUSD as investors the world over seek the safety of its balance sheet and the attractiveness of its yield.

Meanwhile, the one unit that has shown remarkable resiliency over the last two days has been the pound. After being battered relentlessly by series of negative economic news, cable was able to recover most of its losses and bounced back to 1.9800 level. One piece of news that helped was the better than excepted reading in DCLG House prices which printed at 3.7% versus 3.3% forecast. The report is likely to keep the pressure on the BoE to keep rates steady for the time being and therefore alleviate some of the selling pressure on sterling.

Finally in US the calendar remains sparse with only Pending Home Sales and Wholesale inventories on tap. Trade may continue to be volatile in North American session but likely driven by continued turbulence in equities rather than any fundamental economic news.
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