Morning Foreign Exchange Report : Arab Uprising Causes Appetite for Risk to Plummet

Published: Tuesday, 22 February 2011 07:06 BST - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Arab Uprising Causes Appetite for Risk to Plummet

Pro-democracy protests have escalated in the last 24 hours across the Middle East and Northern Africa. Colonel Gaddafi’s 42 year rule in Libya looks to be nearing an end as anti-government insurgents continue their violent protests in the capital Tripoli and in other Libyan cities. One of Gaddafi’s sons yesterday reported that two Eastern cities had been lost to demonstrators and there were reports that several senior officials had defected. Gaddafi’s response to the protests has been to order warplanes and helicopters to fire on the massed crowds.

Political unrest in Arab states caused a dramatic jump in oil prices, with the price of a barrel of crude up by 2.6% on the day to $105.20 during yesterday’s afternoon session in Europe and Brent crude oil futures up by 5.6% on the day. This sharp appreciation in oil prices is partly attributable to comments by the leader of the Al-Suwayya tribe in eastern Libya, who yesterday stated that the tribe will stop oil exports to western Europe if Gaddafi does not end his violence towards demonstrators. The pro-democracy uprising appears to be spreading across the Arab world, with protestors taking to the streets in Yemen, Bahrain and Morocco, following the pattern of the recent insurgencies in Tunisia and Egypt.

Rumours of heightened tensions in Iran and in OPEC’s largest oil producer, Saudi Arabia are also surfacing. If violence did spread to these states, then oil prices could rise dramatically to test their record level of July, 2008, when a barrel was fetching close to $147.

Fears over the escalating violence and a potential spreading of political contagion to other Arab states has caused significant losses for global equity markets over the last 24 hours, with New York exchanges closed yesterday to mark President’s Day, London set the tone, with the FTSE 100 losing over 1% on the session. Asian stocks followed London’s lead overnight with the benchmark Nikkei Dow in Tokyo down by 1.65% and the Hong Kong ‘s Hang Seng losing almost 2% on the day.

Meanwhile, in Japan, ratings agency Moody’s has cut Japan’s credit rating from ‘stable’ to ‘negative’, citing fears over the size of the country’s national debt and suggesting that the government needs to take action to tackle its borrowing levels. Japan currently has the highest levels of national debt of any industrialised nation.

The downgrading of Japanese bonds, violent scenes in Arab states and fears that political unrest could spread to key oil-producing nations have caused strong support overnight for safe haven currencies. The US Dollar has gained over a cent against the Euro since the start of yesterday’s European session. The Yen, Swiss Franc and the Canadian Dollar have also gained ground. With futures markets pointing to a very negative day for the S&P 500 when New York re-opens, further gains for the funding currencies looks highly likely.

Turning to New Zealand, an earthquake overnight has killed at least 65 people, with the death toll expected to rise. This has caused a significant flow of funds out of the Kiwi Dollar, which was already under pressure due to risk aversion in the markets.

Investors will look to this afternoon’s Canadian Retail Sales figure for December and the US consumer confidence survey for February to provide further signs of a strengthening of the real economy in North America. However, these releases are unlikely to cause a pickup in appetite for risk in the markets.

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