“Currency markets display extremes of risk aversion”

11th February 2016

Abi Oladimeji, head of investment strategy at Thomas Miller Investment, comments on currency moves as global growth remains moribund…

In recent weeks, financial markets have been in the grip of a significant rise in risk aversion.

Equity markets have sold off and credit spreads in particular have widened to levels that are typically seen during periods of outright recession or economic crisis.

The drivers of the elevated risk aversion have varied over time as investor concerns have moved from the weakness in oil prices to fears of widespread default in the energy sector; and from concerns about China to worries about banks’ balance sheets.

Focusing specifically on the currency markets, a notable development in recent weeks has been the strength of the Japanese yen and, to a lesser extent, the resilience of the euro against the US dollar.

Sure it makes sense for the dollar to weaken in the face of concerns about near term US economic growth and expectations that the Fed will likely find itself unable to raise interest rates as much as it flagged in December.

But, as things stand, both moves now look overdone in the shorter term.

Clearly, global growth is moribund and key leading economic indicators suggest that the outlook remains precarious.

Nevertheless, in the absence of any negative shocks in the immediate future, the main industrial economies should avoid outright recessions.

Over the next few weeks, we would expect to see a recovery in risk appetite as incoming data confirms ongoing global growth, albeit at a modest pace. Consequently, we would expect to see the yen and the euro strength fade relative to the dollar. Equities should also recover some of the ground lost so far this year.

Leave a Reply

Your email address will not be published. Required fields are marked *