Despite the US holiday, currency markets did not skip a beat from last week’s devastating Carry Trade sell off. In fact, the moves of the London Session have been similar to Friday in terms direction and scope. Strength in the Japanese Yen has led another round of vicious selling of Carry Trade pairs, namely EURJPY and AUDUSD. Perhaps due to the absence of some US traders, volume is a bit lighter than one may expect given the price action. The environment has been orderly on an hourly basis, yet extremely volatile from minute-to-minute, pinching liquidity at times. Trading this market takes a stomach made of steel and a short memory.
Using the same message as on Friday, it is necessary to view the charts to comprehend the magnitude of the movement seen in the FX market over the past several hours. EURJPY led the Carry Trade lower, dropping nearly 200 pips from 162.50. Both components shared the pain, though the big figure drop in USDJPY – including a break south of 110.00 - seemed to garner the attention of traders. The usual suspects followed: AUDUSD collapsed 200 pips (AUDJPY down 300 pips). USDCAD soared again, reaping the rewards of a flight to the safe US dollar, a severe round of short-covering, and weakness in crude futures. The pair dealt firmly above 0.9550 and is now over 500 pips from its recent lows.
The US bond market is on holiday as the US celebrates Veteran’s Day. US equities are open for trading. An interesting dynamic has occurred during European hours. The GAIN Capital London Session Update often refers to “risk aversion”. In times of fear, such as the present, investors, traders, and market players sell those assets deemed risky (equities, Carry Trade, commodities, etc.) and shift to safer assets, such as bonds or cash. The correlation between risky assets has been relatively bulletproof this year. Today, a (temporary) shift in this paradigm is taking place. Asian equities took a beating, led by the Hang Seng. As expected, the Carry Trade is in the midst of a severe sell off. Accordingly, crude oil is down over -1%. Interestingly, however, both European bourses and US indexes have been quite resilient. As of this writing, the S&P Futures are flat. This inter-market relationship of risk is definitely worth a careful watch.
