The opening London Session of the week brought a lively market where nervous traders went into “risk reduction” mode ahead of policy meetings from both the Bank of England and the European Central Bank. In addition, over the weekend, a prominent US bank announced high-profile management changes and the expectations of massive write-offs due to the ongoing debacle in the illiquid SIV (structured investment vehicles) market, stemming from the weak US housing market and related loans. Couple this news with political unrest in Pakistan, bearish news for the Hong Kong equities (-5%), and hawkish comments from Japan’s Fukui, the ingredients for a Carry Trade sell off were in the FX market.

The currency pair in focus today is EURJPY. This is the proxy for the Carry Trade and often provides excellent insights into the internals of the FX market. At 0200 EDT (0700 GMT), the cross sat firmly above 166.00 after seeing a tight range in Asia. Prompted by comments from Bank of Japan Governor Toshihiko Fukui, immediate pressure came upon the Carry Trade, pushing EURJPY to 165.30. 

``Keeping interest rates lower than the economy's strength is risky. Interest rates need to be increased in a timely manner.'' – BoJ Governor Fukui

Both EURUSD and USDJPY slid, with the latter successfully testing important short-term support at 114.35. The JPY crosses fell across the board. After EURJPY bounced to 165.80, another wave of harsh selling hit the Carry Trade. This move began in GBPJPY, sparked by very weak UK economic data which was released at 0430 EDT (0930 GMT). Over the next two hours, volatility increased and short-term bottoms were placed in the currency pairs that were under pressure, highlighted by a sharp EURJPY bounce off 165.00.

On a final note, USDCAD plunged to fresh multi-decade lows at 0.9300 early in London trading. As the Carry Trade sold off, however, the pair reversed course and now is dealing about 50 pips off the bottom.   

Upcoming Economic Data Releases (New York Session)

  • 1000 EDT US ISM Non-Manufacturing; Consensus 54.0 (relevance: medium)