Yen to Rise, Euro to Fall if Equity Markets Continue to Break

Both the Japanese Yen and Euro were in the spotlight on Friday. Both are being affected by the same news but both are moving in opposite directions versus the Dollar.

Both the Japanese Yen and Euro were in the spotlight on Friday. Both are being affected by the same news but both are moving in opposite directions versus the Dollar.

The central theme driving investors out of the Euro is risk aversion. Speculation that the global economic recovery is stalling is leading investors to shun higher priced assets and move to lower-yielding currencies. This speculation is encouraging the selling of the Euro while triggering buying interest in the U.S. Dollar and the Japanese Yen. This was apparent today when a drop in U.S. consumer sentiment weakened the stock market and the Euro while pushing up the Yen.

Heavy selling pressure in the global equity markets is leading investors to believe that an economic recovery in 2009 and early 2010 is highly unlikely. This is encouraging longer-term traders to reallocate money into the U.S. Dollar and eventually into the U.S. Treasury markets. Furthermore, Japanese Yen investors are pulling their money out of global equity markets and bringing their money back home despite receiving literally no return on capital. This move by the Japanese investor is a clear sign that return of capital is more important than return on capital at this time.

In addition to the falling Euro, traders should note that the selling pressure is also beginning to take its toll on other higher-yielding currencies such as the Australian Dollar and New Zealand Dollar. If economic activity slows down in China then Australia and New Zealand will see a drop in export business. This could cause their respective economic recoveries to stall.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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