The US dollar, the most liquid currency in the world, was tossed around Friday as the currency yielded to carry trade flows that have wreaked havoc in the FX market for most of the week. The only viable indicator available going into the weekend close was the University of Michigans confidence number, which factored in as a mere blip in the elevated levels of price action.
The session was rather mild for EURUSD as the pair bounded off of a 1.3140 low before rallying 60 points to the psychologically intimidating 1.32 figure. In the other majors, volatility was considerably higher. The GBPUSD pairing finally broke an uncharacteristic consolidation formation, on massive 195 point drop that cleared 1.9550 on its way to a temporary 1.9415 low. Honing back on to the carry unwind, the low-yielding Swiss franc pushed 120 points from intra-day lows, to make a shortened triple bottom around 1.2145. Finally, USDJPY dropped to a fresh 11-week low with another 100-plus point decline.
The landscape seems to be changing for the FX market. For over a year, volatility has slowly drained out of the deeply liquid majors leaving market participants to schedule their trades around the rigid economic calendar. However, the drudgery of fishing for small moves produced only in the wake of indicator releases may be coming to an end. In less than a weeks time, price action has risen considerable in the least likely of places, the well-established carry trade. Since last Thursdays highs, USDJPY alone has dropped over 500 points as a global flight from risk has pulled large institutional investors out of the placid investment strategy. While the flows were most notable through selling of some of the high yielding commodity and emerging market currencies to close out a portion of the huge levels of Japanese yen shorts, the trend spread to all corners of the market. With a 5.25 percent benchmark yield, the US dollar is easily labeled a high yielding currency. Furthermore, with the Federal Reserves next move expected to be a cut later in the year, a broader move towards risk aversion could keep the dollar under pressure.
Moving back to the confines of the economic calendar, the days sole report was the revision of the University of Michigans February consumer confidence survey. Using a much larger sample size, the second reading came in significantly lower than expected. From the original 93.3 print, economists expected the gauge to make edge slightly higher. Instead, the indicator came across at 91.3 the lowest level in five months. Giving the pure number some perspective, this is a large drop from Decembers 96.9, two-year high. Whats more, the Indicator directly contradicts the rise in the Conference Boards sentiment gauge, which hit a five-year high for the same period. The deterioration in the UMich number was largely due to a turn optimism among lower income households. This vital consumer group reported concern over gasoline prices returning to highs not seen since September, as well as a bleaker outlook for hiring and wage growth in the months ahead. With subprime mortgage defaults rising, growth slowing and stocks showing signs that a deeper correction is at hand, Marchs preliminary confidence report is shaping up to be worst than Februarys.
Equities staved off the early morning drop so many futures traders were expecting, though the benchmark indices were still painted red. The NASDAQ Composite was off 0.36 percent at 2,395.57 by 16:35 GMT. Following with some distance, the S&P 500 slipped 0.19 percent to 1,400.45 while the Dow lost 0.14 percent to settle at 12,217.52. Despite the relatively stable performance of the overall markets at the time, there were a number of top market movers that attracted attention. Insurance giant AIG saw its shares rally 3.7 percent to $69.88 after reporting stronger than expected quarterly net income figures, while at the same time announcing considerable stock buyback and dividend payout plans. On the opposite end of the finance scale, New Century Financial Corp.s shares dropped $0.58 or 3.7 percent to $15.27 after the firm announced it would delay its earnings report.
Government securities were little moved in the early session hours Friday as flight to safety in the North American sector cooled relative to the Asian and European markets. At 16:35 GMT, the ten-year treasury note was trading 5/32nds higher at 100-24 with a yield 2 basis points lower at 4.528. Bonds were up 6/32nds at 101-12 with yields losing 2 basis points to 4.663.