Risk Aversion is set to continue

The central banks of the so-called emerging countries are sparing no efforts to stem the fall of their currencies in this period of high risk aversion. Especially with the gloomy predictions that the newly adopted U.S. rescue plan will fail to have quick and positive results. If that happens the atmosphere of risk aversion will continue. Mexico, for example, is working hard to support the peso (MXN). The Central Bank of Mexico has sold more than $1000 billion on the currency markets in an attempt to halt the decline of the MXN, which fell to an historic low against the USD on 3rd February. The peso was worth about 10 MXN to the USD in mid-2008, today it stands at 14.22 MXN to the USD.The succes of this attempt to halt the collapse of the peso is uncertain because the aversion to risk could even accelerate in the coming weeks. Traders on all financial markets are very disappointed with the reflationary rescue plan which was presented yesterday afternoon by the new Treasury Secretary, Tim Geithner. Indeed, although traders are broadly aware of the need for a large public intervention, they do not believe that the Obama administration can reverse the current trend of the U.S. economy quickly enough. If these fears are confirmed, the USD could see a sharp rise, once again benefiting from its status as a ’safe haven’.Meanwhile, it was the EUR that benefited yesterday from a technical adjustment between the EUR and the GBP to move a little against the USD. Indeed, the three currencies are closely linked. While the GBP appeared to rise on Monday it fell again yesterday against the EUR due to the gains made by investors who gambled in large numbers on a rebound of the GBP based on the observation that although the UK economy is not about to undergo an upturn, the prospect of a total collapse of the GBP is now more or less ruled out.