Market News & Insights
8 August 2014

Safe Havens in Demand as Risk Aversion Dominates

EUR/USD 1.3380
GBP/USD 1.6800
GBP/EUR 1.2558 (0.7965)
EUR/CHF 1.2133
GBP/CHF 1.5235
GBP/AUD 1.8168

Geopolitical tensions continue to run strong and global risk appetite remains tentative helping boost safe haven currencies like the USD and JPY. Global stocks have continued their decline, yesterday Europe led the way lower, following comments from the ECB’s Mario Draghi that tensions between Russia and the Ukraine will have an impact on the regions growth, but that this would be unknown. Overnight news that US president Barack Obama has authorised target air-strikes in Iraq has continued to impact the global risk environment, with Asian stocks moving lower and the JPY rallying. Not surprisingly this has seen the price of oil on the rise over the last 12 hours.

The big event of the day yesterday was from the ECB and their policy meeting, followed by the policy announcement and press conference. Draghi and the ECB in effect have already pulled out all their big guns, they have already cut rates to fresh all time lows, they have made deposit rates negative, announced the TLTRO program (due to begin in September), with the latter still to come into effect there was little chance we would see the ECB announce anything further.

The ECB maintained their current policy and there was little variance in the ECB statement. Draghi did mentioned heightened geopolitical concerns and their unknown potential impact on growth. Draghi also suggested there is unanimous support for further non standard measures if/when necessary, and they were looking at procedures for asset purchases. Overall the EUR maintained recent ranges, EURUSD traded back lower to support above 1.3330, where EURGBP dropped as low as .7922.

The MPC also met yesterday to discuss BOE policy, the committee once again opted to keep rates on hold at .5% and asset purchases on hold at £375bln. Over the last few weeks we have seen those calling for rate hikes by year end somewhat tempered. UK gilt yields have continued to fall from recent highs pulling the value of GBP lower with them. As per the status quo, the BOE followed up their “no change” announcement with, well, absolutely nothing. This will leave us to wait on the release of the minutes for rate hike indications. Next week’s quarterly inflation report should also give us some decent fodder to look at rate hike timing estimates.

On the whole data is on the light side today, the USD appears tightly linked to risk trends but yesterday improving weekly jobless claims figure also saw a small rally in USD. Should risk aversion continue around the globe, and the US economy continue on its growth path then we are likely to see a very favourable environment for the greenback. We will continue to monitor recent trends but risk aversion appears to be the name of the game this week, and with that safe haven currencies like the USD and JPY are favoured to strengthen.