No Place to Hide; Dollar-Yen Swings Wildly - Will Fed Cut?

[B][U]Talking Points[/U][/B]

  • New Zealand Dollar: Swing wildly as carry trades liquidated
  • Japanese Yen: Revisits lows as Nikkei drops 800 points
  • Pound: Rebounds after European markets open to the upside
  • Euro: German PPI soft
  • Dollar: U of M on tap

Another wild and crazy night of volatility in the currency markets as carry trades and high yielders first staged a rebound after a strong equity finish in New York only to see those gains quickly evaporate after Nikkei fell more than 800 points as panicked investors in Asia sold stocks on fears of a coming credit and global slowdown in growth. USDJPY touched 111.57 - its lowest level in more than a year - but managed to recover somewhat after European markets opened to the upside.
With economic calendar essentially empty and irrelevant the currency market will continue to take its cues from the equity markets. The massive rise in volatility which has pushed some measures of risk such as the UBS risk monitor to all time highs are likely to continue for the rest of the day and perhaps into next week. Markets are clearly looking to monetary authorities for some sings of stability. And the liquidation of stock positions may continue unabatedly until the Fed lowers rates. The rate cut could have two positive effects. First it should lower the cost of credit and perhaps return some confidence in the fixed income markets and secondly it will instantaneously improve equity valuation vis a vis fixed income instruments. Should that occur USDJPY and other popular carry trades such as EURJPY GBPJPY and NZDJPY may see some relief from the relentless selling of the past several weeks.
A Fed rate cut may boost the high yielders like the kiwi Aussie and cable for a brief moment, but whether such a policy move will be enough to avert a global economic slowdown remains to be seen. One of the key problems presently in the financial markets, as an article in FT points out, is the complete lack of transparency regarding the nature of the credit risk. Because many of the asset backed securities reside on the books of secretive hedge funds, investors have little information as to the size of the problem. Therefore the natural response has been to liquidate assets first and ask questions later and given the well publicized calamities that have befallen a variety of hedge funds this dynamic is likely to persist. Credit after all comes from Latin word to trust and until such time that trust can be re-established in the capital markets the currencies will continue their huge gyrations as investors scramble for answers.