* 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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* Sub-prime mortgage concerns raise risk aversion
* JPY carry trade unwinding is major risk ahead
* Expect limited further upside in EUR/USD and GBP/USD
* US advance 2Q GDP report on Friday

The US dollar is closing slightly weaker against European currencies and down more significantly against the JPY, which translates into a lower weekly close for the JPY-cross carry trades. The USD continues to be seen as vulnerable against the backdrop of the losses in the mortgage-backed securities market. Despite those concerns, US stock markets DJIA and S&P) reached new all time highs, but were unable to sustain the gains on the last trading day of the week. The equity sell-off weighed on USD/JPY and JPY-crosses, and provided the only major excitement for the week.  Full text »

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* USD falls to major lows as US stocks hit all-time highs
* Sub-prime fears not a good reason to sell USD
* Fed Chair Bernanke give semi-annual outlook to Congress
* Looking for a US dollar reversal to form

The USD is finishing the week sharply lower across the board, with the most pronounced weakness coming against European currencies. The move lower was ostensibly triggered by concerns over losses in the mortgage-backed securities market, but those fears seem to have dissipated relatively quickly, as US equity markets broke out to new record highs in the second half of the week. But the dollar continued to fall as technical levels were breached and systematic momentum sellers reacted to additional weakness. The USD’s decline has now reached significant technical support levels in the US dollar index and I’m looking for the downmove to transition into a consolidation at the minimum, with decent potential for a corrective rebound in the USD.  Full text »

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* USD closing weaker, JPY-crosses on the highs
* Eurozone finance ministers meeting, may criticize JPY weakness
* Fed’s Bernanke speaking on inflation on Tuesday
* BOJ to hold rates steady; Bank of Canada to hike on Tuesday

The USD is closing lower on the week against all non-JPY currencies, in line with last week’s observation of a breakdown in the USD index. The USD closed slightly firmer against the JPY, which translates into yet another new high for the JPY-crosses and the carry trade in general. The dollar selling got off to a quick start on Monday and minor new lows were made subsequently. Interestingly enough, positive US economic data at the end of the week sparked only a minimal rebound in the USD. (ISM non-manufacturing rose to 60.7 from 59.7, a 14 month high, and June NFP beat market forecasts, though somewhat below ADP-inspired expectations of 150+, but strong revisions to the prior two months data more than made up). The better US data sent benchmark 10 year Treasury note yields up nearly 20 bps from the week’s low, which led to a slight widening in the US interest rate advantage against the EUR, and yet the dollar remained heavy. Persistent USD weakness in the face of the better than expected data and higher rates suggests there is a larger wave of USD selling going through the market and this may be just the beginning of more sustained USD move lower.  Full text »

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