The Financial Fixed Odds update from David Evans, Market Analyst, BetOnMarkets.

The new trading week is only a few hours old, but we are already seeing some significant moves afoot.

Two major news items are responsible for this. The first is the news from Friday Goldman Sachs is being charged with fraud by the SEC with follow up analysis and speculation throughout the weekend from various sources.

Financial and forex markets are not just selling off because of the impact on Goldman, but because of the implications for the wider financial system. Investment Bank profits have bounced back recently and some would argue that this has been due to a return to the use of leverage by investment banks such as Goldman to increase profits (and exposure to losses).

The wider implication is that any investigations could mean greater than expected regulation of the derivatives market, which despite the credit crisis have largely escaped without a re-appraisal.

Impact on the Forex Markets?

Firstly, traders may simply be spooked away from taking ‘risks’ in currencies such as the Aussie and New Zealand dollar and switching back to the US dollar and Japanese yen.

Secondly, many traders have used the leverage that derivative trading affords to make over sized bets on the currency markets, especially on the carry trade which involves borrowing in yen to buy Australian dollars. Which can be good…until your carry trade unwinds and you have leveraged losses.

If risk taking and the leverage that investment banks help provide is curtailed, currency pairs such as the Australian Dollar – Yen and New Zealand Dollar – Yen could see some major volatility in coming months.

UK Election

The second major piece of weekend news is the latest UK general election polls which push the Liberal democrats into second place, throwing the outcome further into doubt and making a hung parliament even more likely.

Traders have been selling the pound in droves this morning as further analysis and polls were released over the weekend. With a hung parliament now more likely than not, traders fear that there will be too much in fighting and horse trading for a coalition government to sort out the UK’s fiscal deficit.

The Pound-Dollar spread is down 0.73% and the Pound – Yen spread down 0.81%. The pound is by far the stand out loser today, but the commodity currencies of the Canadian, Australian and New Zealand dollar are also falling back as oil price.

Investors are generally rotating out of risk with the US dollar and Japanese yen seen as the safer places to be right now.

The volcanic eruption appears to be having very little impact on financial markets so far.

Today’s only planned announcement of real note is Fed chairman Ben Bernanke speaking at 14.00.

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