The currency market offered few signs that the volatility triggered by the recent wave of carry trade unwinding would give out anytime soon. In a world where complacency and risk have been thrown out the window, the dollar continues to advance against most of its pairings even when immediate fundamentals call for selling.
Greenback action was well encompassed by the benchmark EURUSD. In the illiquid opening hours, the pair climbed all the way to 1.3215 before sliding 145 points through the major sessions, before finding the inklings of support ahead of 1.3060. Following on its break late last week, GBPUSD continued to get hammered with a massive 255-point drop that took out the temporary 1.94 floor. The USDCHF pair was late to the game, though a touch off of 1.2210 quickly aroused bids for a return to the 1.2310-50 zone. In the end, the yen was the only major currency still up on the day against the entrenched dollar after a 160 point drop was trimmed to 80 points by mid-New York session.
One weekend was not enough for traders to cool their heels on the carry trade depression. When the market opened once again, the yen and other low yielding currencies were pitched into another steep rally against their high-payout counterparts. While the dollar was not the exception to the rule, the market was showing signs that the big moves on carry trade unwinding were being isolated to those pairs with the biggest spreads. Now, aversion to risk seems to be dominating traders efforts. With another day of sharp selling in Asian and European stock markets, emerging market currencies and other risky investments, investors are moving capital to safer bets like US Treasuries. One event that was expected to throw some water on the aggressive carry flows was Japanese Finance Minster Koji Omi and US Treasury Secretary Henry Paulsons wrap up on their scheduled meeting. Market participants were looking for any hint that either official was concerned with the sharp moves in currencies or equities, or even a whiff of a possible move to intervene by the Bank of Japan. Alas, both men disappointed saying only that both economies were firm and that reiterating the yens value should be determined by the market.
With the dollar well supported by flight-to-risk buying, there was sufficient momentum to help the currency weather a disappointing ISM service sector report. Following up on the better than expected manufacturing number last week, todays service gauge was quite the disappointment. Economists forecast a dip to 57.1 for the indicator; but were instead met with a 54.3 print. While this was still above the 50.0 growth/contraction level, it is also the slowest pace of expansion since April 2003. Considering the sector accounts for 90 percent of GDP and a vast majority of US jobs, this number is particularly important for gauging the health of the economy. With this in mind, the employment, new export orders, and inventory change components all grew over the month, which takes some of the sting out of slower prices paid and domestic order growth.
Stock markets finally caught a breather from the recent wholesale sell off Monday morning, though traders were still on their toes in case institutionals started dumping positions after lunch. By 16:50 GMT, the Dow was leading with the biggest move and the only green hue on a 0.26 percent advance to 12,145.18. The NASDAQ Composite put in its own 0.08 percent decline to 2,366.08 and the S&P 500 a marginal contraction to 1,386.80 by the same time. Within the headlines, the big decliners were drawing the most attention. Management at sub-prime lender New Century Financial Corp. announced that the firm was technically in default and was now under investigation by regulators. Investors did not take the news well and sent shares tumbling $8.87 or 60.5 percent to $5.78. Shares of Palm Inc. were pushed 7.3 percent lower to $16.97 in a retracement of Fridays considerable 11 percent rally that was triggered on a rumor that Nokia may make a bid for the PDA maker.
The shuffling of capital from risky assets to more secure ones didnt seem to arouse too much influence in the Treasury market Monday morning. T-Notes were trading 3/32nds lower at 100-29 with yields up a basis point at 4.511 by 16:50 GMT. Longer-termed bonds slipped 4/32nds to 101-21 while yields rose a basis point to 4.646.