Yesterday, we had said that even though carry trades rallied, the move was unconvincing because the New Zealand dollar did not participate in that rally. Today, we see all of the gains made on Tuesday erased.
Carry trades continue to remain vulnerable as stock markets around the world weaken. The Nikkei was down 1.6 percent overnight. Further weakness tonight will result in additional losses for the Yen crosses. According to MoF official Watanabe, the Japanese are now also worried about US contagion.
Written by Kathy Lien, Chief Currency Strategist of DailyFX.com