Wednesday, July 29, 2009

Daily Forex Update - Carry Trade Liquidation

Carry trade liquidation and a spike in volatility were the two major themes for the forex markets during the final trading session for the calendar year. Existing home sales and relative calm in central Asia helped the greenback recover some of last week's losses.

As you can see in Figure 1, the U.S. dollar (purple) was the second-best performing major currency today behind only the Japanese yen. The drop in crude oil prices hurt the Canadian dollar. The loonie (light blue) was the worst performer against the greenback. The British pound (dark blue) started the N.Y. trading session as the big winner but finished in the middle of the pack due to carry trade liquidation.
The Dow Jones Industrial Average dropped over 100 points reflecting a general bearish sentiment surrounding the outlook for the U.S. economy. The yield on the 10-year Treasury note inched closer to 4 percent - 25 basis points below the current Fed funds target rate. This discrepancy shows that bond traders are expecting the monetary policy setting board to drop the overnight cash loan rates another 25 basis points at the next meeting in January. But, despite these two seemingly bearish events for the greenback, the U.S. dollar had one of its best days of the year with most of its gains coming during the N.Y. trading session. The best news for the embattled currency was that Pakistan was able to avoid more turmoil over the weekend in the wake of the assassination of ones its popular political figures.

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