Ten Reasons Why the “Risk Trade” Is Off in Forex

07/01/2010 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

There is no shortage of reasons for why risk is off with the sharp decline in consumer confidence and other factors adding fuel to the selloff in the financial markets. Perhaps in anticipation of a weak non-farm payrolls report on Friday, consumer confidence dropped to the lowest level since March. 

The decline from 62.7 to 52.9 in June was much larger than the market had anticipated and the steepest since February. With equities falling sharply in May, American consumers grew more pessimistic about present and future conditions. Their greatest concern was job growth, but the possibility of European contagion may have also contributed to the change in sentiment. The equity market has been particularly volatile over the past two months. The drop in sentiment supports the expected deterioration in the labor market. The selloff in the forex market has driven EUR/CHF to a new record low, EUR/JPY to an eight-year low, and EUR/GBP to a 19-month low. 

The softer consumer confidence number added fuel to the fire on a day when investors were already nervous for the following reasons:

1) Conference Board's sharp downward revision to Chinese leading indicators

2) Talk of Japanese exporters being severely underhedged

3) Dubai Aerospace cancelling Airbus orders

4) The expiration of the ECB's one-year lending facility on Thursday

5) The IMF's warning about Austrian supervision of foreign currency loans

6) The new 24-hour strike in Greece against austerity measures

7) The drop in ten-year Treasury yields to the lowest level since April 2009

8) The warning by the San Francisco Fed that the California state fiscal crisis will worsen before it improves

9) Standard and Poor’s said this week that the recent agreement between the Spanish government and the country's 17 regional governments is a positive step, but may not be enough if revenues come in weaker than officials expect.

10) Sharp decline in consumer confidence

As you can see, there is no shortage of reasons for why investors are nervous. The possibility of non-farm payrolls turning negative on Friday could keep pressure on the financial markets and the US dollar bid. Don’t forget that this week is the month-/quarter-/ half-year end in most countries and the fiscal year end in Australia, which can create unusual volatility. 

By Kathy Lien of GFTForex.com

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