Currency traders forced a substantial US dollar rebound through early-week trade, as a sharp rise in risk aversion led to swift short-covering across forex markets. The day’s results proved particularly damaging to the global Carry Trade, as the Japanese Yen was by far the largest gainer among all major world currencies. The risk-linked US dollar was not far behind in its advance, and the previously high-flying Canadian dollar posted its largest single-day decline in at least 36 years.
A relatively empty global economic calendar left markets to trade off of the performance in risky asset classes, and tumbles in the Japanese Nikkei 225 and the Hong Kong Hang Seng indices forced major Yen rallies through overnight trade. The key barometers of risk sentiment lost 2.5 percent and 3.9 percent, respectively, and the equity market rout spread to highly risk-sensitive emerging market currencies and stock markets. Overextended forex market positioning led speculators to cover US dollar shorts on the renewed market volatility, but a bounce in the Dow Jones Industrial Average was enough to slow the greenback advance.
Whether or not the dollar can continue its short-term rebound will be the key question in the days ahead, but retail forex positioning suggests that such moves may be short-lived. According to FXCM dealing data, nearly 63 percent of retail traders remain long the US dollar against the Euro. These one-sided markets have historically been a contrarian indicator for short-term price action, and the data suggests that the medium-term dollar downtrend will continue through upcoming trade. Retail forex speculative positioning remains similarly one-sided on the US Dollar-Japanese Yen currency pair, and history suggests we may continue to see USDJPY losses before any substantive rebound.
Japanese Yen price action will likely depend on global equity markets, and today’s bounce in the Dow Jones Industrial average has led to a pullback in the carry trade-linked currency. The Dow added as much as 132 points through the earlier New York session, but a later pullback leaves it just 37 points improved to 13,080. The more diversified S&P 500 did not share in the Dow’s recent strength, however, remaining almost exactly unchanged at 1,454. At the same time, the NASDAQ Composite actually lost 0.6 percent to 2,612 at time of writing.
US Treasury markets were closed for the domestic Veteran’s Day holiday, but a drop in short-term interest rates yields suggests that yields would have otherwise traded lower on global risk aversion.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]