Liquidity returned to the market after the US finished their Thanksgiving holiday. Last week we saw EUR/USD continue to make all-time highs but markets reversed sharply on Friday, leaving EUR/USD over 100 pips off those highs. Today, EUR/USD couldn’t trade back over 1.4850 while GBP/USD found sellers in front of 2.0650. USD/JPY was choppy as it found buyers early after Asian equities opened strong but sellers pushed the JPY crosses lower after reports that China would invest some of its foreign exchange reserves in Japanese stocks.
The news that China would invest in Japan has some interesting implications. Recently, global equities have been positively correlated to the JPY crosses because of risk reduction. Leveraged portfolios that are both long equities and JPY crosses must sell if either goes down to generate liquidity. However, if China invests in Japan, this could cause a negative correlation between equities and the JPY crosses as China must buy JPY in order to buy Japanese stocks.
Looking forward, the US is back so expect more volatile trading on uncertainty in the credit and housing markets. In Asia we are expecting Japanese inflation and retail sales, two key reports.
