Yen Gains as Risk Appetite Falters, Euro Eyes Italian Bond Sale

The Japanese Yen is outperforming as risk aversion strikes financial markets, weighing on carry trades. The Euro looks to Italian bond auction results for direction.

Talking Points

Yen Gains as Aussie, NZ Dollars Fall as Risk Aversion Strikes Markets
Euro to Look Past Industrial Production Data, Eyeing Italian Bond Sale

The Japanese Yen is outperforming as European stocks follow Asian bourses lower in early trade, with risk aversion driving an unwinding of carry trades funded cheaply in the perennially low-yielding currency. Not surprisingly, the high-beta Australian and New Zealand Dollars are feeling the brunt of the selloff. While no singular catalyst behind souring risk appetite has emerged, the move may simply owe to profit-taking.

Indeed, the MSCI World Stock Index – a proxy for larger sentiment trends – closed at a five-year high last week. Looked at another way, speculators were the most net-long S&P 500 index futures in over three years as of last week (according to data from the CFTC). With many of the fundamental themes supporting risk appetite already in the market long enough to be significantly priced in, a period of correction seems reasonable.

Eurozone Industrial Production figures headline the data docket, with output expected to drop 0.1 percent in January compared with the prior month. While soft print argues for ECB stimulus to offset recession, the central bank seems unlikely to act while political instability in Italy undermines policy transmission. With that in mind, the data’s impact on the Euro is likely to be limited. An auction of 2015 and 2028 Italian bondsmay prove of greater interest. A jump in average yields or a significant drop in the bid-to-cover ratio, a measure of demand, will point to growing sovereign risk jitters and stand to weigh on the single currency.

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