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Yen enjoys risk off sentiment

Risk-off sentiment dominated markets overnight spurred on by the brewing financial crisis in Argentina which saw the Argentine peso plunge by more than 16% yesterday, its fastest collapse since Argentina’s 2002 economic collapse. The peso stood at 6.88 per dollar on Tuesday and as of Thursday’s close, it was at 8 to the dollar.

The devaluation can largely be attributed to the government’s lack of intervention as previous attempts of devaluation has sacrificed its reserves and resulted in higher consumer prices, with inflation expected to hit 30% this year. The economic mismanagement of the last decade on the part of governments has once again brought Argentina to the brink of a balance of payments crisis. Despite being shut out from global credit markets since defaulting on its debit in its 2001-2002 financial crisis and amassing dollars to pay off government debt via restrictive currency controls, the bank’s reserves has plummeted to $29 billion.

With the absence of tier one data today, with the exception of inflation data from Canada, markets are likely to focus on the potential of contagion risk on the developed markets should emerging economies such as Turkey follow in its footsteps. The largest movers overnight were undoubtedly USD/JPY, recording a 1.1% loss on the day and AUD/USD printing fresh yearly lows. The strength in the yen was driven by rising risk aversion as the Nikkei declined 1.94%, the yen has quickly breached support at 104.00, 103.00 and is setting its sights at 102.50.

The Aussie has been the victim of emerging market risk, concerns over news out of China where the government is increasing its scrutiny over credit risks in the coal-mining industry and its economic backdrop. Although Australian inflation accelerated unexpectedly at a pace of 2.7% on an annualized basis in 2013, comments from central bank board member, Heather Ridout, saying that “an Aussie around 80 cents would be a fair deal” has led to the Aussie’s decline to 0.8716 at time of writing.

In Europe, stock indices are in a sea of red with the DAX down 1.03% and Ibex 35 in a similar fashion at 1.88%. The euro, has had a volatile session, hitting a high of 1.3740 and retreating back to the 1.3675 area, as developments in Argentina play out on the common currency and European based flows placed further pressure (with EURTRY at a record high). ECB President, Mario Draghi, is slated to speak at noon today on “the path from crisis to stability.”

In his speech today, Bank of England’s Mark Carney continued to distance the central bank from its forward guidance, away from its 7% unemployment threshold, and reiterated that there will be no imminent rate hike until such time that the recovery is sustainable. He highlighted that the economic recovery to date was driven by a reduction in uncertainty, the repair of the financial system and household spending. As GBP/USD is knocking its door at the 1.6500 handle, support is seen at 1.6495 and 1.6455. On the flip side, resistance is located at 1.6667, and 1.6700.

As we head into the North American session, indices are expected to follow with its Asian and European peers with Dow futures down 1.08% currently. Investors and traders alike will focus on corporate earnings, China and Latin America. In Canada, CPI rose 1.2% year-on-year, missing estimates of 1.3%. On a monthly basis, inflation contracted 0.2%, in line with forecasts. The print of 1.2% has eased pressure on the Bank of Canada as it puts inflation back within the bank’s control range of 1% to 3%. Technically, a close below 1.1063 will open the door to 1.1026 and 1.0970. Resistance for USD/CAD is set at the recent high of 1.1174.

By  Cheryl Girling of Cambridge Mercantile group