[B]Talking Points
• Japanese Yen: Oscillates around 106 as equity markets whipsaw
• Euro: Trades down to 4364 but bounces as Europe recovers
• British Pound: Back above 9500
• Canadian Dollar: BOC rate decision on tap
• US Dollar: Return from holiday all eyes on equities[/B]
Another tremendous night of volatility in global capital markets that saw Nikkei drop more than –750 points while Hang Seng fell a mind numbing –2000 points wiping nearly 9% off the value of equities in Hong Kong. The action in stocks of course kept the pressure on the carry and at one time the EURUSD traded down to 1.4364 as EURJPY nearly hit 152.00. To put this price action in perspective, the EURJPY cross which has been the primary proxy for risk appetite in the FX market for the past several years, has shed 900 points in less than 7 days.
Although pandemonium reigned supreme at the start of European trade, with many equities on the continent seeing no bid whatsoever, a semblance of order soon returned and half hour into the open, stocks actually stabilized spurring violent short covering rallies in the carry trades. EURJPY verticalized more 100 points while GBPJPY skyrocketed 300 points in less than 30 minutes.
All eyes will now turn to the US markets and as we noted yesterday, “It’s difficult to gauge if the holiday close of the US markets will actually help to temper the volatility as US investors have the benefit of another day to consider the situation or if the forced respite will only exacerbate matters as pent up sales demand hits the tape.” Dow futures are called –500 points lower and the index will certainly plunge at the open. But the question ahead is whether US equities will stabilize or crater into the close.
In the past few days, rumors of an emergency intra-meeting rate cut by the Fed have flooded the currency market. It’s clear that US policy makers would prefer to wait until January 30th to ease in an orderly fashion. However, if the Dow declines by more than-1000 points today, the pressure on Fed officials to cut rates instantly will be immense. Dr. Bernanke and company will no doubt be watching the markets with particular care today and may be forced to act irrespective of their personal preferences
In short, if the bounce in Europe carries through to the US the worst of the carry trade liquidation may be behind us for the time being, and the EURUSD as well as the other high yielders could see sharper short covering rebounds. If however, US equities end on the lows, the sense of doom and gloom is likely to remain in the FX markets and the greenback and the yen will strengthen as the carry is unwound further.
How much more selling will there be in the carry trade? Will DJIA end –1000 today? Join us in the EURUSD forum
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]