Carry Trades: Are They In for More Losses?

Nov 12, 2007 (DailyFX via COMTEX) -- - US Dollar Expected to Rebound This Week - Canadian Dollar Sees Biggest Rise One Day Rise in 36 Years

Carry Trades: Are They In for More Losses? With the US bond markets closed for Veterans' Day, the equity and currency markets were as volatile as ever. Intraday charts show US equities fluctuating in and out of positive territory with the intraday trading range of the Dow reaching as much as 181 points. The Japanese Yen crosses were in the red or negative throughout the US trading session. Today's extensions of Friday's losses were not a complete surprise because on Friday we had indicated that with the Dow closing "at its session lows, we expect follow through weakness in the Yen crosses at the open of Tokyo trading on Sunday." What we didn't expect however was the degree of the move, which in some cases matched and surpassed that of the moves we saw on Friday. The combination of stronger Japanese economic data and significant weakness in the Asian stock markets appeared to be too much for carry traders to bear. Domestic CGPI and the current account were both better than expected but stronger economic data alone would not have caused today's move. The Chicago Board Options Exchange Volatility Index (VIX) opened at the highest level since August, when we had a big spike up to 37.50. Carry trades thrive in an environment of low volatility which means that should the VIX continue to rise, and it appears to want to, carry trades could suffer more losses. It is important for Yen traders to not only watch the Dow, but also the VIX. Tonight, we have the Japanese GDP report for the third quarter, which is expected to be firm.

US Dollar Expected to Rebound This Week Despite the lack of nay US economic data released today, it is already shaping up to be a dollar positive week. Oil prices are lower and gold plummeted as much as $30 an ounce. The main events this week are producer prices, retail sales and consumer prices. Bernanke is also holding a special session on November 14 to announce changes in FOMC communications but this should not be market moving since he is only expected to announce measures to increase the transparency of interest rate decisions such as giving more forecasts and extending their horizon. We continue to believe that the data this week has a greater chance of surprising to the upside. The estimates for October retail sales are low (0.2 percent) because many of the nation's largest retailers have missed their sales forecasts. However, non-farm payrolls over the past few months have been exceptionally strong and gasoline prices in the month of October remained steady, which means that retail sales could still beat expectations. Also, we expect both producer and consumer prices to surprise to the upside given the rise in food and energy prices. Will this be THE bottom in the US dollar? No. The reason why the Dow and carry trades were so weak today is because the market is still concerned that a large structured investment vehicle has blown up and Deutsche Bank's predictions of another $400 billion in subprime losses could materialize, which of course is not good news for the US economy.

Canadian Dollar Sees Biggest Rise One Day Slide in 36 Years The Commodity Currencies are all significantly weaker against the US dollar today as a result of carry trade liquidation and commodity price retracement. Economic data is not really to blame because even though New Zealand house prices grew at a slower annualized pace last month, the RBA statement was more hawkish than dovish. The RBA revised down their growth forecasts for the next 2 years but they also revised up their inflation forecasts. Canada did not release any economic data, but the currency still managed to incur its biggest one day slide in three decades. On Friday, we had said that fundamentals, technicals and sentiment all pointed to a reversal but we did not expect the majority of the move to happen in one day. Although we could see further gains, parity will be an exceptionally hard level to break in USDCAD. Australian business confidence is the only piece of data due for release from any these three countries over the next 24 hours. With the Dow closing at its session lows, there could be further losses.

Euro: Be Careful of What You Buy Depending on which currency pairs you traded today, you could have made money being long Euros. On Friday, we had said that the better buy this week may be relative strength plays like EURGBP or EURCAD than the EURUSD itself because of the risk of stronger US data. Interestingly enough EURGBP and EURCAD were two of the few currency pairs that are actually up on the day. In an environment where we have a potential for a dollar rally, the dollar's biggest gains would be against the currency pairs whose rise have been driven mostly by speculation and flow rather than economic data. This is the case with the British pound which reported only downside surprises last week and the Canadian dollar, which has rallying on the belief that oil will reach $100 a barrel. Although this trend could continue, tomorrow we should have some Euro driven movements with German GDP, the ZEW survey and Industrial Production due for release.

British Pound: Down 400 Pips Even though inflation in the UK rose by the fastest pace in 1 year, the British pound fell 400 pips today. Last week the British pound rallied 300 points despite signs of weaker growth and it is not until this week that price action finally reflects fundamentals. This is more obvious when we look at EURGBP. After range trading between 69 and 70 cents for the past 2 months, we finally see a strong break to the upside. The ECB and BoE face similar inflationary conditions but the ECB could realistically raise interest rates given stronger economic data but the BoE does not have much choice other than to keep rates unchanged for the foreseeable future

Indian central bank says bought $11.9 bln in September

MUMBAI, Nov 13 (Reuters) - India's central bank bought a record $11.87 billion in intervention in September to slow the rupee's rise after U.S. rate cuts drew huge inflows into the stock market, its monthly bulletin showed on Tuesday.

The Reserve Bank of India has bought $51.8 billion in the first nine months of 2007, with the previous record purchase at $11.86 billion in February.

Despite the intervention the rupee has appreciated 12.3 percent against the dollar this year. It was trading at 39.4 rupees per dollar on Tuesday afternoon, after last week hitting 39.16 -- its strongest since March 1998.

Foreign portfolio flows of nearly $17 billion into the stock market this year have been a key driver for the rupee.

India's currency reserves have also risen $89.3 billion this year to $266.5 billion on Nov. 2. (Reporting by Anurag Joshi; Editing by Ranjit Gangadharan)

Australian Dollar Rebound Potential Offers Range Trade Opportunity

Often times, a good range opportunity comes hand in hand with a high probability of a breakout and vice versa. The set up in AUDUSD is certainly walking that fine line. Recently, the pair cascaded lower, carried by wave of risk aversion that produced volatility in a nearly 175 point decline. The weekend pulled the plug on momentum; but the chart is still marked with lower lows - raising the prospects of a breakout. However, with the weekend acting as a potential cooling period for the previous decline we could very well see a rebound on the auspices of mild event risk in the first half of the week. Our suggested strategy is tailored to the possibility of a breakout move with good entry and tight stop. To play this scenario more conservatively, the objective can be set at 0.9150 to take profit on a small bounce before a possible continuation move.

Event Risk Australia and US

Australia – A number of second-tier economic releases do threaten to force unexpected volatility, but we believe we would have to see especially large surprises to force worthwhile moves in the AUD. A notable exception may include the RBA Quarterly Monetary Policy Statement on the 11th. Though we have recently read RBA commentary in the form of the recent post-hike statement, any substantial shift in rhetoric may fuel choppy AUD trade. Otherwise the Aussie will trade off of global risk sentiment. If global equity indices continue to falter, we could easily see the AUD falter against the USD. Hence it will be important to watch price action in equity indices so as not to get stopped out of our AUDUSD trade.

US – Economic event risk will be limited in early-week trade, but that will clearly change by Wednesday, as Producer Price Index and Advance Retail Sales reports threaten to force major volatility in USD pairs. Highly anticipated retail figures are typically market-moving events, and recent consumer confidence data will only increase scrutiny on the report. The next day’s Consumer Price Index figures may likewise force sharp moves in the dollar, and range traders will really have to monitor any USD-based range trades on the 14th and 15th of next week.

China central bank hikes bank reserve ratio to control credit growth

BEIJING (XFN-ASIA) - China's central bank said it is raising the bank reserve ratio by 0.5 percentage point in a move to control overly fast lending growth.


The increase is the ninth this year in the proportion of funds banks must hold in reserve. It takes the ratio to 13.5 pct for most banks.


The People's Bank of China, in a brief announcement on its website, said the increase will take effect November 26.


The move was not unexpected. Analysts had been predicting at least one more interest rate hike and possibly two increases in the bank reserve ratio before the year-end.


"We could see one (interest rate hike) as early as next week," said Stephen Green, economist at Standard Chartered Bank in Shanghai.


The central bank has already raised interest rates five times this year.


Next week, the government will announce consumer price index data for October, and that might give the central bank the ammunition it wants to push through another interest rate hike.


Investment bankers Goldman Sachs have said that China's consumer inflation may exceed 7 pct for October and November, prompting authorities to drastically tighten monetary policy despite rising uncertainties surrounding global demand going into next year.


Year-on-year consumer price inflation shot to 6.5 pct in August - the highest reading in more than a decade - on the back of food prices hikes, before easing slightly to 6.2 pct in September.


For the January to September period, inflation stood at 4.1 pct, well above the central bank's comfort zone of 3 pct set at the beginning of the year, in spite of the repeated interest rate hikes.


Authorities have been issuing a steady stream of warnings on the inflation front.


The central bank said this week that strong price pressure remains and inflation needs to be watched closely, with further potential increases in grain prices, which could propel the CPI higher.


Price pressures are also evident in the property sector, energy prices and labor costs.


Meanwhile, the nation's banking regulator, the China Banking Regulatory Commission, has instructed banks to slow their lending in the final months of the year.