Dollar Closing In on 5% Targets, Where are the Value Points?

The type of moves that we have seen in the currency market during the Asian and European trading sessions are typically what we see in a quarter or a half year. USD/JPY has fallen 5 percent, AUD/USD is down more than 8.5 percent while the NZD/USD is down 7 percent. The sell-off in the Japanese Yen crosses are even more severe with AUD/JPY down 13.5 percent and NZD/JPY down 12 percent. Here is a list of the biggest movers as of 9am ET:

Yesterday, I warned against a premature top in the EUR/USD!

Although it may be very tempting to say that the dollar has hit a top, especially against the Euro, in order for this EUR/USD rally to be real and for investors to be convinced to stop selling higher yielding currencies, we need to see stabilization in the financial markets and a return of confidence.

The mentality in the currency and stock markets is sell now, ask questions later. The low yielding US dollar and Japanese Yen continue to be the biggest beneficiaries of risk aversion. The only thing that investors want right now are safe haven plays. The dollar’s strength will force emerging market countries to rush to prevent a flight of capital out of their currencies – more rate hikes could be likely. With deleveraging being the theme of the day, when confidence is lost, it will be difficult to recover.

Where are the Value Points for the Currency Market?

In the Wed edition of my Daily GFT Report and on CNBC and Bloomberg I talked about how the dollar could rise another 5%. At that time, the EUR/USD was trading at 1.2829 and the GBP/USD at 1.6236. The GBP/USD has already hit my 5 percent target and at one point this morning even became undervalued on a purchasing parity basis. Although the UK GDP report confirms that the country is headed for a recession and validates the weakness, I believe that we have seen a near term low in the currency pair.

The EUR/USD on the other hand has only dropped 2.5 percent. The EUR/USD does not become a value play until 1.15-1.20. As for USD/JPY, it has also reached my target of 95. Although I won’t be a buyer at these levels, I won’t be a seller either. There are no rewards for heros in this type of market.

Will the BoJ Intervene?

If you are wondering about Bank of Japan intervention, don’t expect it to happen. As an export dependent nation, a strong currency is not in Japan’s best interest. However unlike in the past where the BoJ has intervened when USD/JPY fell below 105 and 100, we may not see any action by the Japanese government this time around. Since the problems are inherent in the US and the Eurozone, intervening at this time may be counterproductive for the Japanese. The Japanese government needs to stand aside and allow the US and Eurozone governments to take their measures to spur growth and not strengthen the dollar for their own short term relief.

If intervention was on the table, the Japanese PM would not make the following comment this morning:

RISE IN YEN NOT ALWAYS BAD BECAUSE IT PUSHES DOWN OIL PRICES FOR JAPAN”

Risk of Limit Down Day in US Stocks

With S&P futures already trading at limit down this morning, there is a decent chance that circuit breakers may be hit in the first hour of trading. The moves in the Dow Jones Industrial Average these days is strikingly similar to the move in 1906 and 1907 (Here is a chart from Barclays). In the last phase of the sell off between Q2 of 1907 and Q4 of 1908, the Dow dropped 37% before it bottomed out. From the August 11500 levels in the Dow, a 37% move would take the index down to a new 6 year low of 7245.

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Barclays Capital

Barclays Capital

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In the Financial Papers: Today’s Top Forex News 03.04.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 06:41 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:

 

Podcast Covers:
– Bank of Canada Cuts Interest Rates by 50bp, Says More to Come
– Reserve Bank of Australia Raises Rates by 25bp
– Is the ECB Getting Worried About the Euro?
– Rice Prices at 20 Year High
– Warren Buffet says in the US Is Already in a Recession
– Nikkei drops 600 points

The Dow is Falling, Why Isn’t USDJPY?

The Dow is down over 300 points, yet the US dollar has remained stationary against the Japanese Yen throughout the US trading session. Over the past few weeks, on DailyFX, I have talked about how the correlation between US equities and carry trades is breaking down because buying one no longer means buying the other. Risk aversion is still a problem and traders may simply be recycling money that is parked in local currencies.

However one other factor explains why USDJPY is frozen and it is simple, there are no more sellers!

According to the latest COT report, yen longs have reached an extreme. This means that everyone who wants to be short US dollars against the Japanese Yen are already short.

The following charts illustrate the big divergence in today’s price action in the Dow and USDJPY. Equities traders only wished that the Dow ended the day “flat” like USDJPY.

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In the Financial Papers: Today’s Top Forex News 01.23.08

Here is the “In the Financial Papers Radio Broadcast” (Length: 11:19 minutes), all the news related to the foreign exchange market. The player should load automatically. Please let me know if you like it. Contact Kathy

In the Financial Papers:

 

Podcast Covers:
– Bank of Japan Intervention: Is it Possible
– ECB Trichet Remains Hawkish But Don’t Expect a Rate Hike
– Bank of England: Feb Rate Cut Not Foregone Conclusion
– Global Equity Markets Snap Back, But is the Pain Over?
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Dow Futures Down 500 Points, Ugly Day for Stocks and Carry Trades

It will be difficult for US traders to enjoy their day off today (it’s Martin Luther

King’s day) with a complete meltdown happening in stock markets around the world. The UK’s FTSE index fell 5.48% or 323 points, the worst single day loss since 9/11 in 2001. The MSCI World Index dropped close to 3%, the largest decline since Sept 2002.

But even bigger percentage losses were seen in other countries:

German DAX Index -7.16%
Paris CAC-40 Index -6.83%
Hong Kong’s Hang Seng Index -5.49%

The selling began in Asia on speculation that Bank of China could be forced to write off a fourth of their nearly $8 billion subprime mortgages holdings (Marketwatch story).

Unless Dow futures recover significantly Tuesday morning, US markets could be setting up for a very ugly open with Dow Futures down over 500 Points!

dow012107

The US dollar is up across the board on rising risk aversion while carry trades are headed for their worst drawdown since the Euro’s inception:

carry012108

Be careful! The worst of the mortgage mess is not behind us.

Carry trades live and die by 3 things:

1. Volatility
2. Risk appetite
3. Direction of monetary policy.

Unfortunately, in the current market environment, all 3 of these factors are not favoring carry trades. Volatility across the financial markets has surged. The VIX which is a measure of US equity market volatility closed last week not far from its 4 year high. Today, the VDAX-New Index which is a measure of European equity market volatility surged 39 percent, the largest rise since 2001. Risk appetite has plunged with the collapse in equities and central banks around the world are shifting from monetary tightening to monetary easing.

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