Mayhem ensues in the financial markets again today. $700 billion bailout plan signed into law? That’s not reassuring to Main Street any more. 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 (BNPQY.PK) 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 at one point fell more than 500 points Monday in stock trading and is now below the 10,000 level. Nasdaq 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, the Swiss franc, the Australian dollar and the 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 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.
