Aussie Dollar Sinks, Yen Aims to Capitalize on Risk Aversion

The Australian Dollar looks likely to remain under pressure while the Japanese Yen looks to find its way higher as risk aversion grips financial markets.

Talking Points

Australian Dollar Sinks as China News-Flow Dents Sentiment
Yen Looks to Capitalize on Carry Unwind Amid Risk Aversion
Eurogroup Summit Eyed for Clues on a Way Forward in Italy

The Australian and New Zealand Dollars are underperforming to start the trading week in the wake of a disappointing Chinese Non-Manufacturing PMI data released over the weekend. The report showed service-sector activity growth slowed to the weakest in five months. The outcome weighed on risk appetite in Asian trade, sending carry-linked high yielding currencies downward along with share prices. China also announced new curbs on the property market, including higher down-payments and interest rates for second-home mortgages, sending the Shanghai Composite sharply lower and compounding the risk-off mood.

The Aussie was particularly hard-hit, with risk aversion compounded by a round of disappointing economic data. Most notably, Building Approvals unexpectedly fell in January, sliding 2.4 percent. More of the same appears likely in the hours ahead. S&P 500 stock index futures are pointing sharply lower ahead of the opening bell on Wall Street, hinting the sour mood prevalent in Asian and European trade is likely to carry forward and threatening to further punish the higher-yielding FX space. Meanwhile, the Japanese Yen may capitalize as traders unwind carry trades funded in the perennially low-yielding currency.

In terms of scheduled event risk, all eyes are on the Eurozone Finance Ministers meeting set to begin in Brussels. The sit-down is expected to be followed by press conferences from recently installed Eurogroup head Jeroen Dijsselbloem, EU Economic Affairs Commissioner Olli Rehn and ESM chief Klaus Regling. Needless to say, traders will be acutely focused on any remarks regarding Italian political instability in the wake of the inconclusive general election outcome. An extension of maturities on EFSF/ESM loans for Portugal and Ireland as well as a bailout for Cyprus are likewise expected to appear on the docket.

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