Jane Foley, Research Analyst at Rabobank, suggests that 24 hrs ago the commodity currencies were among the best performers on a 1 day view but today, the CAD is still holding its ground but it is mainly the safe haven currencies including the JPY and the CHF which have been at the top of the board in reflection of the wave of fear that hit global banking stocks hard in yesterday’s session. Key Quotes “One of the most worrying parts of the sell-off in bank related assets was the absence of a specific trigger. Instead banking stocks appear to be undermined by concerns about how banking performance will be impacted by a culmination of the concerns that have dogged risk appetite all year. These include anxiety about growth in China and many emerging markets, worries about the wider impact of the December US Fed rate hike and concerns about how banks’ balances sheets will cope with flattening yield curves. Underpinning these worries is fear about the ability of central banks to stimulate growth and inflation going forward given that interest rates in most major economies are already at or close to record lows. Despite unprecedented levels of monetary stimulus from major central banks in recent years, most of the world’s largest economies have returned some disappointing economic data this year. Manufacturing data in the US and the UK has been soft in recent months and this morning Germany published far worse than expected industrial production data for December at -1.2% m/m. While equity markets finally appear to have woken up to the risk that easy monetary policy settings are not necessarily a fix for all of the ills of the global economy, not every one of this year’s economic data releases has been bad. Although parts of the US economy lost momentum into the end of last year, the unemployment rate dropped below the 5% level in January and there has been some acceleration some in US wage growth. Even though the market sees little chance that the Fed will hike rates at next month’s FOMC meeting, speculation about recession risk in the US still appears premature and as it stands we continue to expect that the next policy move from the Fed will be a rate hike. Tomorrow, Fed Chair Yellen may offer some reassurances about the outlook for the US economy in her semi-annual Monetary Policy Report to Congress. How Yellen spins this year’s mixed bag of economic news could be crucial in setting the tone for the coming weeks. Risk appetite may find some support from reassurances from the Fed that further rate hikes are in sight if it can be linked with improving prospects of growth and inflation in the world’s largest economy. Yellen clearly will have to choose her words carefully. If Yellen’s succeeds in restoring some sense calm to markets, safe haven currencies such as the JPY, CHF in addition to the EUR can be expected to give up some ground. As we have argued several times before, the low levels of risk appetite in the market this year have drastically reduced the ability of central banks such as the ECB, SNB and the BoJ to lead their respective currencies to weaker ground in spite of the use of aggressive policy settings. The SNB have made it clear that it will use FX intervention to soften the value of the CHF. Both the ECB and the BoJ are using a combination of asset purchases and all three central banks are using negative interest rates. However, these policies are likely to be far more effective at weakening the EUR, CHF and the JPY respectively when levels of volatility are low, risk appetite is high and investors are prepared to short these currencies. Based on the view that the Fed will be able to hike rates later this year we are expecting that the USD will end the year at moderately better levels vs. the JPY, EUR and CHF. However, this forecast assumes that levels of risk appetite improve.” For more information, read our latest forex news.