* Carry trades (JPY-crosses) get crushed; more downside likely
* USD rebounds against Europe and commodity currencies
* Japanese elections on Sunday
* ECB and BOE rate decisions on Thursday
* US data slate is heavy; NFP on Friday
The USD dollar recovered sharply this past week, but the major development looks to be the meltdown in carry trades, most clearly evident in a collapse in the JPY-crosses. In last week’s update, I cautioned again that the increase in risk aversion emanating from the debt/credit markets was likely to spread to equity markets, and that this might prove to be the trigger to a carry-trade sell-off. My worst case expectation that M&A/LBO associated debt issues would not find receptive buyers looks to have transpired, with debt issues for KKR’s acquisition of Alliance Boots being shelved until conditions improve. (The next touchstone of debt market receptivity will come next week when a smaller tranche of KKR/Boots debt is set to go on sale, having been delayed from this week and re-priced with higher interest rates to attract reluctant investors.) That news came out on Wednesday and unnerved equity markets, but the major sell-off came on Thursday, and sent investors the world over running for the exits. Full text »
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