The US Dollar, Dow Jones Industrial Average, and Treasury Bonds have all seen incredible volatility on continued liquidity troubles across global financial markets. The Dow lost as many as 343 points through the trading day before a sharp reversal led it slightly higher through the close, while Bond Futures were similarly whippy and just barely held key technical resistance on the day?s end. This all served to force particularly pronounced moves across most forex pairs, with the Japanese Yen as the primary beneficiary of the flight to quality from risky asset classes. Of course, the previously high-flying Euro was no exception to the rule?the single currency fell by a record amount against its Japanese counterpart. The EURJPY tumble led to a similarly pronounced EURUSD decline, but the world?s most actively traded currency pair posted a remarkable reversal through end-of-day trade. Such a move left the Euro above critical support and arguably leaves scope for a continued rebound through short term trade. This outlook will nonetheless depend on price action in key global asset classes; namely, global fixed income and stock markets.
[B]Bonds - 10-Year Treasury Note Futures
The 10-Year Treasury Note Future remains one of the best barometers for risk aversion throughout finance, and its hold below key technical resistance may signal that speculators may return to risky asset classes. Though markets clearly remain on knife?s edge as ongoing turmoil is seemingly far from over, we nonetheless see positive signs in the key US Government debt market. The late bounce in the Dow Jones Industrial Average limited the 10-Year?s impressive ascent through the day and left yields above two-year lows. Indeed, if today?s reversal stays constant, 10-year bond yields may rise for the first time since July. The subsequent implications for currencies?especially the Euro and Japanese Yen?is relatively clear. Namely, a continuation of the late sell-off in Treasury markets will signal that traders may once again take on risky positions in the Euro and keep it afloat against the resurgent US dollar.
[B]FX - EUR/USD
Market technicians have been keen to note that the Euro broke below a multi-year trendline through today?s slide, but the late reversal leaves scope for a subsequent EURUSD retrace higher. Indeed, a close above the line may limit the single currency?s continued march lower. The dollar initially strengthened on the continued carry trade unwind, as traders were quick to unload overstretched greenback shorts. Yet a tumble in bond yields and rate expectations easily sunk the dollar against major counterparts, with interest rate futures pricing in a previously unthinkable 50 basis points in Fed interest rate cuts through December.
Though such a move in market rates may be slightly overshooting reasonable expectations for monetary policy accommodation, the fact remains that markets are unlikely to continue buying dollars if yields diverge sharply from major currency counterparts. The Euro clearly stands to benefit, as forecasts for European Central Bank monetary policy changes have remained relatively stable despite financial market turmoil. All else remaining equal, this could push the EURUSD higher through the short term.
[B]Equities - Dow Jones Industrial Average[/B]
[B][/B]The Dow Jones continues to dominate market headlines for all the wrong reasons, but the downtrodden index managed to finish the day higher on a sharp reversal through late trade. Such developments left the DJIA above fairly significant support and may keep the key 30 US large-cap stocks bid through the short term. Continued credit scares and general market illiquidity showed signs of slowing, with futures prices likewise reflecting fairly sizeable gains ahead of the key Asia session. This has translated into similar bids across extraordinarily volatile carry trade pairs, and likewise leaves scope for a continued reversal in the US dollar. The greenback has responded favorably to recent market tumbles, but the currency may lose its darling status among forex traders if equity markets slowly begin to retrace. If the Dow Jones holds above longer-term support, we may indeed see the Japanese Yen shave off previous advances and the Euro regain appeal among forex speculators.