Risk aversion and Draghi’s speech were the two main themes for foreign exchange markets in recent trading sessions. The US stock market was on a roller coaster ride for the past three days as stocks were down sharply on Tuesday, enjoyed their best day of the year on Wednesday only to give back those gains and more on Thursday. The US stock market has enjoyed a spectacular ride – nearly tripling from its 2009 low but even the IMF (which does not often get involved in market calls), called equities frothy in its latest economic outlook released this week.
Risk aversion benefited the safe haven Japanese yen, which managed to check the dollar’s advance and to keep dollar / yen below the 108 level. The pair was last trading around 107.80. Lower US government bond yields also removed some support from the US currency as the 10-year yield fell to 2.32%.
Draghi’s speech at the Brookings institution in Washington halted an attempt by the euro to rebound versus the dollar. Draghi spoke of the need to reflate the Eurozone economy and restated the ECB’s commitment to use additional unconventional stimulus measures to boost activity. Draghi promised the ECB would raise inflation back towards the 2% level while sounding cautious on the region’s economic outlook. Two days ago the IMF downgraded its economic forecast for the Eurozone.
Draghi’s comments drove euro / dollar back down to 1.2663 while hours before Draghi spoke, it had traded as high as 1.2791 (the euro had already moved off that high well before Draghi started to speak to be fair). In subsequent trading the euro drifted back towards the 1.27 level and it was trading at 1.2696 most recently.
In conclusion, slower global growth prospects, the prospect of a correction in risk assets and how policy makers plan to respond to these challenges will preoccupy not only foreign exchange markets but also the IMF / World Bank annual meetings of ministers of finance and central bank chiefs that start today in Washington. Statements out of these meetings will be closely watched in the absence also of major economic releases (except Canadian employment numbers).