Forex Carry Trades Unwinding Sharply
05/14/2009 12:01 am EST
After showing signs of yet another resurgence in risk appetite late yesterday in the North American session, the fibrillating equity markets finally took a more convincing dive southwards in the European session and the beginning of the US session. The obvious trigger early in the NY session was a poor showing by the US consumer, as advanced retail sales showed another ugly contraction, bringing the year-on-year comparisons down to an unprecedented -11.1% and -8.4% less autos. As long as the unemployment rate continues rising in the US and credit markets remain tight, it is tough to imagine a resurgence in consumption and makes the structural appearance of a resurgence elsewhere in the economy look more like a restocking cycle after drawing down inventories rather than the stuff of a sustainable recovery. This kind of data challenges the green shoots sightings that are all the rage.
The Bank of England quarterly inflation report, out yesterday, not surprisingly showed that the Bank continues to hold a dour view on the economy, forecasting lower projections of growth to a negative annualized 4.5% as Q2 gets under way and then moving to expansion in 2010. Inflation was seen bottoming at 0.5% in late 2009 before heading above 1% in two years. This outlook obviously leaves the bank plenty of room to keep rates unchanged for some time, but the outlook that growth will resume and inflation will begin to tick up in eight months or so suggests that little additional QE is planned in the interim (though the Bank was quick to express the extreme uncertainty in its projections, having been burned by its past assessments of what will happen). At first, the market decided that this news was GBP bearish, but we would suggest that it is fairly neutral and GBP is making a bit of a comeback from the knee-jerk move lower. GBP bears need 0.9070+ in EUR/GBP before we can talk up another round of weak GBP. To the downside, 0.8915 is the first trigger of note, though the range extends all the way down below 0.8800.
The JPY finally began rattling its cage in earnest yesterday and today as all of the positive JPY ducks are now lined up, with US treasuries back on the bid. We will watch the 3.00% level in the ten-year benchmark with extreme interest, as a swoon in yields back below this level could really get the likes of AUD/JPY, CAD/JPY, and even EUR/JPY on a steep correction path lower. Right now, the ten-year benchmark trades around 3.13%, a hair above its 200-day moving average. Another worrying factor for the JPY bears should be the article out in Bloomberg about the very large holdings of JPY shorts by the so-called "Japanese housewives"-a contrarian signal if there ever was one.
Chart Study: AUD/USD
AUD/USD has corrected a bit lower with the swoon in risk. The fall in equity prices and copper prices in recent sessions are of most concern. Still, the chart shows us that there is plenty of room for a sizeable correction without jeopardizing the overall trend. The 0.7325 area could generate some interest if the correction lower gets going in earnest.
By the staff at Saxo Bank