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Re-defining Risk

I talked yesterday about the way we are seeing risk return to markets. But we’ve moved on from the old mantra of ‘risk-on, risk-off’ that was prevalent a few years ago. We’re in a very different environment now, where we’re seeing the Aussie rally to 10 month highs against the US dollar, whilst at the same time the yen is holding its ground. If you need a sign of how the times have changed in 2016 look no further than Saudi Arabia, who are raising USD 10bln from a consortium of international investors. This is the first time they’ve had to go to international investors for 25 years, a function of the low oil price we’ve seen over the past 8 months or so. The fiscal deficit of 19% of GDP over-shadows all those seen elsewhere in the developed and also emerging world, but it’s not a concern given the lack of debt that weighs down much of the developed world.

For today, we have UK employment data released at 08:30 GMT. As with the US, it’s not the labour market data that is the problem in the US, at least when it comes to employment levels. The overall rate is seen steady at 5.1%. More crucial is wage data, given the perceived softness of overall earnings, with headline earnings seen rising from 2.1% to 2.3%. That will be where the more hawkish eyes will be trained. Sterling itself continues its reversal upwards, up to levels seen at the start of the month against the dollar, with EURGBP having moved away from the highs above the 0.80 level. I talked last month how sterling was trading more like a risk currency, so more like the Aussie than the yen, so it’s not surprising that we’ve seen sterling rise as risk sentiment has risen in markets overall. Overnight, we’ve seen the last trade data in Japan fall short of expectations, although the yen has continued to remain firm, USDJPY pushing below the 109 level as we head towards the European open.

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