The London Session is in the midst of one of the most volatile trading environments in recent memory. The carry trade is the central theme as currency traders hammered down the Japanese Yen carry pairs. Today, traders are unwinding the Carry Trade with unrelenting aggression, reducing positions in what is considered a “risky” FX trade. Volume and volatility have been very heavy into and through the open, though liquidity remains at a premium during this holiday week. This led to very healthy ranges across the board. Economic data had absolutely no impact on trading, revealing the overriding importance of the ongoing global credit situation and its effect on risk.

The reason for the ongoing pressure on the Carry Trade has little to do with the direct currency fundamentals or that of a specific country. Instead, it is due to the correlation between multiple markets around the world. This was stated in the August 1st GAIN Capital London Session Update:

  • “Simply put, multiple markets around the world are moving in tandem and will continue to do so in current conditions. Similar markets – in terms of perceived risk - are rising and falling together. For example, both the S&P 500 (an index of US equities) and the carry trade currency pairs have moved in lock-step due to the perception of relatively high risk that each investment holds.”

Today, the theme of risk aversion was driven home yet again. This has rattled global markets, as shown by the very weak European bourses and strong US Treasuries (the 10-year yield is at 4%). Throughout the session, traders have eyed the S&P Futures as they moved with the representative of the carry trade, EURJPY.

Every so often, there comes a session that contains price action that is best described visually, not verbally. Nonetheless, a written summary is necessary. The price action of the FX market has been downright ruthless. EURJPY has been the best representative of the consistent rise and sporadic falls of the carry trade. At 0200 EDT (0700 GMT), the cross was trading at 162.00. The pair has shed 170 pips and currently flounders at 160.30, near its lows. USDJPY has been hammered, at one point shedding 100 pips from 109.20. As expected, the charts of the JPY crosses and high-yielding AUD and NZD show similar beatings. The most devastating flurry of selling – reminiscent of the August 16th meltdown – occurred in AUDUSD. The numbers speak for themselves: 150 points lower in 47 minutes. The final 30 pips came in a 10 second period of time as sellers annihilated anything in its path to a 0.8655 low (estimated). The USD held a firm bid, perhaps in a flight to safety, except versus the Japanese Yen. USDCAD and USDCHF have both outperformed, with the former adding over 80 pips from the low around 0.9790.

On a final note, I am baffled that it took a fellow trader to remind me of the concluding story of today’s GAIN Capital London Session Update. On virtually any other day, when EURUSD trades to new all-time highs – as it did only a few hours ago – it would occupy the headline. Today, it is merely a footnote. Traders acknowledge four market drivers: technical, fundamental, structural, and psychological. Perhaps the psychological feedback is that the influence of the Carry Trade within the framework of global risk reduction is being underestimated, revealed by its dominance over the story of incremental highs made in EURUSD.  If true, a full unwinding of the Carry has the potential to be far more devastating than any may be predicting.

Upcoming Economic Data Releases (New York Session)

  • 0830 EDT US Initial Jobless Claims, consensus: 330k (relevance: low)
  • 0830 EDT US Continuing Claims, consensus: 2575k (relevance: low)
  • 1000 EDT Nov US Univ. of Michigan Confidence, consensus: 75.0 (relevance: medium)
  • 1000 EDT Oct US Leading Indicators, consensus: -0.3% (relevance: medium)