Different Fates: Stocks Plunge But US Dollar Surges On High Demand

Mayhem ensues in the financial markets again today (Monday). $700 billion bailout plan signed into law? That’s not reassuring to Main street anymore. Central banks working hard to inject liquidity into the markets? No visible effect. Governments to insure full bank deposits in some European countries? That’s nice but people are still nervous, so scared. All that’s really making a lasting impact is how the financial crisis seems to be worsening day by day. BNP Paribas has agreed to buy Fortis’ units in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion) after a government rescue plan fell apart. Over in Germany, the government put together a 50 billion euro bailout plan for Hypo Real Estate, Germany’s second-biggest commercial property lender - a move that shocked the Europeans and caused the Euro to tumble further.

In the stock markets, it’s all dump, dump, dump. The Dow (^DJI) at one point fell more than 500 points Monday in stock trading and is now below the 10,000 level. Nasdaq (^IXIC) at one point fell more than 6%. This dramatic panic selling may not result in a pause in trading, as the Dow’s drop on Monday has not exceeded the 1100-point drop in a day, according to NYSE’s guidelines.

No one can tell if that’s considered capitulation, but it’s certainly not pretty.

In the forex markets, the chorus is ‘Buy Buy Buy the US dollar’. The US currency is the undisputed king of all currencies, as it rose sharply against the Euro, the battered British pound, Swiss franc, Australian dollar and New Zealand dollar in forex trading. However, the dollar fell against the Japanese yen as investors flee from ‘risky’ stocks and other assets.

If you are still holding onto any carry trades ‘for the long-term’, you might want to know that the carry trade is buried far below the ground (along with any little hope you may have) and may not resurrect in the medium-term.

The moves in the forex markets today are truly unbelievable. The biggest losers are namely the high-yielding currencies like GBP, AUD and NZD, with the British pound suffering the most. GBP/JPY plunged 1200 pips (that’s eye-popping, and I believe is the largest 1-day drop in history); GBP/USD fell nearly 400 pips to below 1.7400. The normally tame AUD/JPY fell more than 1000 pips and NZD/JPY tumbled more than 700 pips.

In a nutshell, the US dollar is in such a high demand now, despite talk that the Fed may cut interest rates by surprise sometime this week. In addition to the USD, the Japanese yen is another big winner in forex as traders ride on the broad unwinding of carry trades.

My advice to currency traders: Make only day trades and don’t fight the sentiment.

Economic Calendar For Tuesday:

Reserve Bank of Australia rate decision 0330 GMT (rate expected to be cut from 7% to 6.5%)

Fed’s Bernanke speaks on economy, markets in Washington 1715 GMT

US FOMC minutes 1800 GMT

UK Nationwide consumer confidence 2301 GMT

Posted in Categories: Forex, Stocks, USA.

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Comment by Back from Hamptons

2008-10-06 12:15:25

A lot of these moves are exaggerated by the lack of liquidity in the markets. It now takes a lot smaller transactions to move the FX markets.

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Comment by Kiwi

2008-10-06 15:35:42

There are billions in fixed term Yen trades maturing this month in EUR, AUD and NZD, the timing is not a coincidence, every trade has a counterparty, the Tier One bank that provided liquidity. The Japanese OTC carry trade will take major losses.

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