USD
The dollar traded mixed on Friday, rising versus the euro and the pound but falling against the yen; after markets suddenly became highly risk averse. The result was a massive flight to safety. The dollar benefited from safety-demand for its 10-year U.S Treasuries but overall the currency fell against a broad basket of currencies according to the dollar index. The real winners were traditional safe-havens like the yen, the Swiss franc and gold. There was no specific concrete single event which caused the sudden panic, although the main reason appeared to be concerns about the economic recovery in emerging markets, in light of the Fed’s continued promise to taper its QE programme. This had led to fears that tapering would reduce investment in developing countries, weighing on growth. Fears about a slow-down in China also weighed. Overall data was poorer-than-expected; the University of Michigan Confidence survey fell to 80.4 when it had been expected to rise to 83.5. Building Permits undershot expectations, coming out at -3.0% versus the -0.3% expected, and Housing Starts fell to a deeper-than-expected -9.8%. Only Manufacturing Production and Capacity Utilization came out above-expectations, at 0.4% and 79.2% respectively.
EUR
The euro traded mixed on Friday, rising versus the pound, falling versus the yen and trading broadly unchanged versus the dollar. Bar euro-zone Construction Output, which is of little significance, there was no major data out for the currency; although yesterday’s higher-than-expected PMI’s continued to have follow-through impact, providing support for the currency. Concerns about a lack of liquidity continued influence the euro. A recent rise in short-term lending rates had led to fears that lending between banks in the euro-area and to the wider economy would dry up, leading to a deflationary spiral. Low prices could keep the euro relatively robust, however, should the ECB intervene and use monetary policy to try to increase liquidity, the currency would inevitably fall back down again.
GBP
The pound fell on Friday, after the BOE governor Mark Carney commented that an overly strong pound could hurt exports. Carney went on to reassert his pledge to keep interest rates low for an extended time to help boost the recovery. This came on-top of fears that the BOE could push back the 7.0% unemployment threshold which currently triggers a policy review. Speculation about a change in the threshold came after further comments made by Carney at the economic forum in Davos. Asked whether the BOE would move the threshold to a lower figure Carney replied: “There are a broad range of things we can do,” adding he was “against unnecessarily focusing on one indicator.” The governor said the economy was in a “different place,” to where it had been 6 months ago when he had taken over. Recently BOE official Paul Fisher had said that he was against tightening policy even if the 7.0% unemployment threshold was reached in the “near future.”
JPY
The yen rose strongly on Friday, reversing its short-term trend against the dollar after a massive increase in safety-flows. This came as a result of concerns about a slow-down in emerging markets as a result of Fed tapering. Recent lacklustre Chinese data, and the attempts by authorities to impose more regulation on the countries massive shadow-banking sector also weighed on global risk appetite, as these factors are expected to slow down economic growth in less developed regions. As a result investors fled risky assets and opted instead for tried-and-tested safe-havens such as the yen, the Swiss Franc and gold, all of which showed massive one-day gains. The yen was further supported by up-beat economic reports, such as the BOE monthly economic report, which was particularly optimistic about the outlook for exports.