As we warned yesterday, dollar weakness is not over. However that statement is only true for the US dollar against the Japanese Yen, Swiss Franc and the Euro. This is because the US dollar actually strengthened against the commodity currencies and the British pound as risk aversion triggers dominate the currency market.
Even though I have been calling for the US dollar to continue to weaken against the Euro, Japanese Yen and Swiss Franc, there could be a further recovery against the high yielders. Being long dollars may not be the wrong trade if it is against the right currencies. Triple digit swings in the US stock market and 300 pip swings in currencies will make it very difficult for carry trades to recover.
In fact, I am more bearish on carry trades than the US dollar. Since the AUD/USD and NZD/USD are also carry trades, they are vulnerable to further weakness. It is important for traders not to forget that the US dollar is now a funding currency for carry trades.
Thankfully the Federal Reserve is not alone.
According to Barney Frank, the Chair of the Financial Services Committee, the Treasury department is finally willing to discuss ways to help the hundreds of thousands of Americans facing foreclosure. Proposals by Frank include forgiving a portion of some of the remaining principal and insuring up to $300 billion in refinanced, affordable-cost mortgages. Capital requirements have also been cut for Fannie Mae and Freddie Mac, which will allow them to use some of their excess funds to buy mortgages. This would add up to $200 billion of immediate liquidity into the mortgage backed securities market and hopefully the combination of efforts from the US government and the Federal Reserve will put an end to the market’s misery. Realistically, it will be some time before these plans are passed and any stimulus will also need time to filter into the markets.
In the meantime, the Philadelphia Fed manufacturing survey and leading indicators are due for release tomorrow. The drop in the Empire State manufacturing survey to a record low suggests that we could see a similar move in the Philly Fed index. Leading indicators should also be dollar negative given the sharp deterioration in the US economy and in the stock market.