Global gloom concentrated in Europe boosts yen – dollar

Dark clouds are gathering over the global economy and the ultimate safe haven currency is moving forward. The Japanese yen, which was on the back foot for a long time and even saw USD/JPY break 110, is now moving the big winner  across the board. USD/JPY is below 107 and yen crosses are also going south.

Here are the reasons for the gloom that accumulated in the past fortnight:

• German weakness: Factory orders fell in the euro-zone’s locomotive and it was blamed on school holidays. When industrial production joined in, there were more  concerns for worries. And now, business confidence in Germany went negative for the first time  since  November 2012.
• FOMC Meeting Minutes: While  Yellen and her colleagues did reflect on a strong dollar, they also expressed worries about global growth, focusing on the euro-zone. This is a factor in the Fed’s decisions.
• IMF gloom: Managing Director of the IMF, Christine Lagarde, described the situation as the “new mediocre”. During the discussions in Washington, the worries concentrated around Europe.
• Impact on the UK: If the Fed is worried about Europe, also the UK is. UK Chancellor of the Exchequer George Osborne, said that the biggest threat to the UK recovery comes from the euro-zone. We can already see that very low  inflation has crossed the channel and sent British CPI to the lowest in 5 years.

The worries about the euro-zone and the world in general are reflected in falling oil prices and falling yields, which reflect lower growth and lower inflation.

Why isn’t EUR/USD breaking to new lower ground? Well, it already did quite a lot. The dollar rally may have reached over-extended levels. In addition, the mentions of a strong dollar from various Fed officials have also helped this much needed correction. The greenback does remain relatively strong and hasn’t gone too far from the record levels.

So, this might be the yen’s turn: The yen reached oversold levels and triggered worries about the negative impact of a weak yen on Japanese exports.

But can the dollar recover as well? Some think that  EUR/USD Recoveries Are For Sale and the lower levels below 1.25 are coming very soon.

What do you think?