Another night of risk aversion has lifted the yen to a six week high against the euro and a four week high against the buck as WHO raised the alert status of the swine flu crisis from 3 to 4. Keiji Fukuda, assistant director-general for health security and environment noted that the increased threat level “signifies that we have taken a step closer to pandemic. It is also possible that as the situation evolves over the next few days we could move into Stage 5.”
Up to now fatalities from the outbreak have only been reported in Mexico but scientists are concerned that the genetically mutating virus could be difficult to contain. According to to Tim Uyeki, an epidemiologist in the U.S. Centers For Disease Control and Prevention’s flu division, “The cases in the U.S. don’t have any links to contact with pigs. This appears to be ongoing human-to-human transmission.”
Swine Flu has 'Pandemic Potential'
The currency markets remain on alert as well with USD/JPY in particular reflecting the heightened sense of tension as traders fear that negative impact of the pandemic may be more economic in nature rather than medical. If consumers retreat for a sustained period of time and economic activity once again slows to a crawl any potential rebound in global demand in H2 of 2009 could severely impaired.
We noted earlier that despite the fact that it has yet to see any outbreak of the swine flu within its borders, Japan may be its greatest victim as the strength in the yen continues to wreak havoc with the country's economy. As we stated earlier, “The latest tide of risk aversion triggered by the swine flu epidemic hurts the Japan in two ways. First, the higher value of the yen squeezes profit margins for the export driven Japanese economy. Secondly, if the swine flu crisis persists for an extended period of time it may further dampen global trade reducing the country’s income.”
The EUR/USD meanwhile has been contained to a very tight 1.3040-1.2990 range for most of the night as currency markets monitor the news. The economic calendar remains very quiet with only US consumer confidence on the docket today. Having taken out the 1.3000 barrier as we suggested yesterday it might, the pair now finds itself in a relative state of equilibrium. We continue to believe that the stronger threat to the euro will come from the German unemployment data due later this week rather than the current geo-political concerns. For the time being however, the pair is attempting to stabilize at the 1.3000 level and if the North American session proves uneventful it may remain range bound for the rest of the day.
