The 246 point drop in the Dow today erased all of this week’s gains in both US equities and carry trades.
With no major news other than Merrill Lynch’s write down, a wave of risk aversion has swept through the financial markets. Despite a relatively busy Japanese economic calendar next week that includes machine orders, CGPI and the current account, the fate of the Yen crosses will largely depend on the outlook for the Dow. As long as the problems related to the subprime crisis are not behind us, it will be difficult for carry trades to return to their glory days.