Monday’s surge in carry trades and the Japanese yen crosses subsequently saw a sharp reversal on Tuesday, as the increase in investor confidence following the US government’s seizure of Fannie Mae and Freddie Mac proved to be short-lived.
Indeed, the DJIA – which gained 2.58 percent on Monday – plunged 2.43 percent on Tuesday, as 11,500 provided solid resistance. Meanwhile, the Japanese yen gained over 1 percent versus the Euro, British pound, and US dollar while jumping nearly 2 percent against the New Zealand dollar and 3 percent against the Australian dollar. As usual, Japanese fundamentals has little bearing on the currency, as the latest forex correlations report shows that carry trades and the DJIA have increasingly been moving in lockstep (though the correlation is not as high as it was in 2007). Going forward, the Japanese yen will continue to depend on the status of risk appetite in the market, and the evolution of the Fannie Mae/Freddie Mac story will certainly be one worth following.