The US Dollar set fresh record-lows against the Euro and 31-year depths against the Canadian dollar, but a later tumble in the Dow Jones Industrial Average forced a substantial greenback rebound. Speculators remained on the defensive on the 20th anniversary of the 1987 stock market crash, and renewed risk aversion translated into a scramble to cover US dollar short positions on the day’s forex trade.
The euro initially scaled fresh record-highs of $1.4318 in the early London session, but sharp tumbles in the Dow instantly led the single currency lower in subsequent price action. The British Pound remained resilient in the face of the short-term dollar rally, however, as bullish economic data improved the Sterling’s prospects against major forex counterparts. Other high-yielding currencies fell victim to a broader carry trade unwind, and the Japanese Yen was the second-largest gainer among major currencies. A 1.0 percent rally in the Canadian dollar made it the top performer in the day’s forex trade—leaving the loonie at fresh 31-year heights against its US namesake.
An empty economic calendar left forex markets to trade off of broader risk sentiment, and tumbles in risky asset classes forced strong volatility in major currency pairs. Currency trader skittishness was easily seen in forex options prices, with implied volatilities on short-term Japanese Yen contracts soaring to monthly heights. Such moves were exacerbated by the uncertainty surrounding the current G7 summit in Washington DC.
The Group of Seven Financial Ministers will release an official statement tonight at approximately 18:30 EST (22:30 GMT), which will likely make specific reference to currency market volatility and its negative effects on the stability of global economic growth. Yet the key question remains whether or not the G7 will name specific currencies and reflect concern over Japanese Yen and US dollar weakness. Any explicit concerns on either oversold currency would easily force a sharp rebound through short term trade. Otherwise, traders will likely continue to sell the greenback and yen against previously high-flying counterparts.
For more on the potential effects of the weekend’s G7 summit on the US dollar and Japanese Yen, please see our recent special report on how we may trade Japanese Yen and greenback volatility following the official summit : http://www.dailyfx.com/story/topheadline/G7_Meeting_to_Cause_Extensive_1192714306123.html
The Dow Jones Industrial Average fell a whopping 217 points to 13,671 on disappointing earnings data—a substantial decline coinciding with the 20th anniversary of the 1987 market crash. Broad drops left the diversified S&P 500 1.5 percent lower to 1,517, while the NASDAQ Composite was the day’s largest percentage loser at 1.6 percent to 2,755.
Continued market skittishness unsurprisingly boosted government Treasury bonds, with the yield on the 2-year note dropping 9 basis points to 3.81 percent. Longer-dated debt was likewise affected, as the 10-year note yield tumbled 9bp to 4.40 percent.
Written by David Rodríguez, Currency Analyst for DailyFX.com