Carry Trades Could Face Further Resistance

The fact that carry trades did not respond to the rally in equities on Friday and bond yields were basically unchanged tells us that risk aversion in the market is still high and traders in different asset classes are not necessarily buying into a Fed bailout.

Although the relationship between the Dow and carry trades broke down on Friday, the fact that the Dow?s rally stopped short of significant technical resistance (the 100 and 50-day SMA as well as the 61.8% Fibonacci Retracement of 14021-12517) does suggest that carry trades could face further pressure this week. This risk is compounded by the likelihood of many central banks turning dovish and signaling that interest rates could remain unchanged for the remainder of the year. The further deterioration in Japanese labor cash earnings and capital spending has had little impact on the Yen as the market is still focused on risk or no risk.