A Heavy Carry Trade Bid Drives Valuations

Overall: The session was dominated by news the U.S. government is planning a Resolution Trust Corporation-like entity to take distressed mortgage securities off the banks' balance sheets. Global equities and U.S. index futures soared, with markets in China and the U.K. rising by record amounts. Currency valuations were driven by a rush into carry trade positions, as the high-yielding currencies rose well off their session lows while the dollar made its biggest one-day advance against the yen since April. All of the yen cross pairs advanced strongly, with EUR/JPY rising by the most this year. There was no economic data released from the U.S. on Friday.

The Euro (Eur/Usd) plunged 140 in early trading, then appreciated strongly as the high-yielders caught a bid on the carry trade. The pair gained during most of the N.Y. session as oil climbed on the day. In economic news, the German PPI was released at -0.6% for the month of August, diverging from the market’s expectations of -0.4%. This is the first time since January 2007 that German producers have seen lower input prices. Even so, the year-over-year read still stands at 8.1%, the highest rate of inflation seen in the last decade. The largest upward pressure came from energy products in the prior months, but now this trend is reversing.

The Pound (Gbp/Usd) traded with the same tone as the euro, except that a 250 pip fall was seen prior to the appreciation. There was no economic data released from the U.K. on Friday.

The Aussie (Aud/Usd) went against the trend established by the euro and pound, perhaps reflecting the bid on gold. The pair continued upwards during the N.Y. session even as gold declined on the surge in equities and finished at session highs. There was no economic data released from Australia on Friday.

The Cad (Usd/Cad) has, once again, seen volatile trading during the overnight session, something that that is becoming more and more common. The pair advanced almost 60 pips at one point but declined in N.Y. as oil caught a bid. There was no economic data released by Statistics Canada on Friday.

The Swissy (Usd/Chf) tested TheLFB R2 (1.1235) after it gained almost 200 pips during the overnight session. The daily chart shows the pair ran into the 1.1280 area, which proved to be a strong resistance in the past, and held strong once again this morning. The pair spent the N.Y. session in decline as Treasury yields rose.

The Yen (Usd/Yen) rose by the most since April as traders piled into the global equity markets. The pair filled the down-gap which occurred on the market open this week to reach 107.90, the closing price made on Friday, September 12. There was no economic data released from Japan on Friday.

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