Are We Headed for More Carry-Trade Hangovers in the New Year

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Today's commentary is by Jack Crooks, editor of World Currency Options and President of Black Swan Capital.

Greetings Currency Traders!

You may have ended your New Year's Eve party a couple days ago. And for some of you, it may have taken a couple days to overcome the champagne hangover. But currency markets are still partying hard santa

.

For starters, the Japanese yen has gained some serious momentum this New Year.

The key driver: The further collapsing credit market. Plus, the global economy may still be at risk if the U.S. falls into a recession. So long, carry-trade!

The euro is making a beeline for its highs of last year.

The key driver: The euro is playing its well-rehearsed role as a dollar alternative. When yesterday's report showed U.S. manufacturing was contracting by the most in roughly four years, you can bet investors went shopping for a dollar replacement. And we might add the Germany jobs report looked mighty good relative to the U.S. economic news yesterday.

Money is being steamrolled into gold and oil.

The key driver: There are still too many economies exposed to the uncertainty of credit markets. For that reason, investors are looking for a safer place to stash their money.

Gold is a widely sought after safe-haven asset on occasion. Meanwhile, oil has been able to defy gravity lately. Both black and yellow gold have reached record highs already this year and delivered some handsome profits.

But of course, this global currency party couldn't possibly go on this long if there wasn't a designated driver. You know: the guy who pledges to stay sober so everyone else can drink, have a good time and not worry about driving drunk. It usually turns out: The designated driver never really has much fun.

Well, the British pound is sober, and it's missing out on all the fun.

The key driver: The U.K. is now facing the same risks as the United States. Investors are seeing the credit market freeze up and wreak havoc on the U.K. economy. There's lots of hesitation in the pound and the buyers are few and far between...even when the rest of the currencies are making heyday at the dollar's expense.

I hope you're enjoying the New Year - we currency market mavens certainly are!

Jack Crooks, Editor of
World Currency Options

Making 'Cents' of the Headlines
The Fed Paints a Chilling Picture for the U.S.

What Happened:

Here's what the Fed said in the latest FOMC minutes which were released yesterday:

"After the robust gains of the summer, economic activity decelerated significantly in the fourth quarter. Consumption growth slowed, and survey measures of sentiment dropped further. Many readings from the business sector were also softer: Industrial production fell in October, as did orders and shipments of capital goods. Employment gains stepped down during the four months ending in November from their pace earlier in the year. Headline consumer price inflation moved higher in September and October as energy prices increased significantly; core inflation also rose but remained moderate."

How the Markets Reacted?

The Dow plunged over 220 points. Oil skyrocketed to a "never seen before" high of US$100 a barrel and gold also skyrocketed to a historic high of US$860 an ounce. Meanwhile, the U.S. dollar index only had about 50-60 pips shaved off of it.

The EUR/JPY currency pair got creamed! This pair fell 300 pips in just 12 hours. If you've been following My Two Cents for a while, you know that I've been stating that carry-trades will get hit much harder than the U.S. dollar-- and so it was yesterday.

There was a ripple effect in every financial market yesterday.

What I Say:

Releasing the FOMC minutes has a huge impact on the markets because the market knows it has no reason to have a bias like an analyst for a brokerage may have.

There's not much hope for the U.S. economy in the near-term. Stocks will fall because the U.S. economy is slowing down. This will cause corporate earnings to slow and layoffs to increase. The consumer will close their wallets, which will further hurt retail sales even more than it has already. So where will currencies go, given all of this new information?

As I said before, carry-trades will unwind much harder than the U.S. dollar. That's because the dollar has been beaten down and these carry-trades are still in the stratosphere. So they have much further to fall in my opinion.

Stocks will continue to dive due to this bad report from the Fed. Carry-trades will continue to sell off (EUR/JPY, GBP/JPY in particular). The Japanese yen and Swiss franc will continue to enjoy the near-term downfall of the U.S. stock market.