Carry Trades Explode On The Rush Into Global Equities

The rush into global equity markets and U.S. index futures during the Asian and European trading sessions drove traders into carry trade positions. The high-yielding euro and pound rose well off their session lows against the dollar while the aussie and kiwi gained at the same time as the dollar was making its biggest one-day advance against the Yen since April.

"Members and readers of TheLFB-Forex.com were alerted to the fact that big changes and their likely impact on the currency markets were coming at the end of Thursday's U.S. trading session" said Jack Jones, senior commodity analyst.

Traders piled into Asian and European equities, U.S. index futures and carry trades on the news the U.S. government was setting up a Resolution Trust Corporation-like entity in order to take troubled mortgage-backed securities off the bank's balance sheets. That followed the DOW and S&P movements from Thursday, which saw those markets erase the 4% losses seen during Wednesday as the news of the government's plan spread.

“This is the typical movement seen when carry trades 'wind' or catch a strong bid," said Matthew Carniol, chief currency strategist at TheLFB-forex.com. “The massive rush into equities will tend to weaken the dollar against the high yielders as the dollar moves higher against the yen. You can see the exact percentage moves in the yen cross-pairs by looking at the corresponding dollar cross. For example, the percentage gain in EUR/JPY will be equal to the sum of the percentage gains of EUR/USD and USD/JPY. The reason for that is because the price of EUR/JPY is equal to the price of EUR/USD multiplied by the price of USD/JPY."

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