When the market opened this week the previous week's trends resumed - USD/JPY down, GBP/JPY down strongly, GBP/USD down, USD/CAD up, EUR/USD down. USD/CHF is still range bound. The unwinding of carry trades is not over yet, and the yen continues to extend its rally broadly.
Several key economic events are slated this week with monetary policy announcements from the Bank of Canada, Reserve Bank of Australia, the Bank of England, and the European Central Bank. Among the decisions, only the ECB is forecasted to shift policy - with markets calling for a 25-bp increase to 3.75%. Traders will focus on the subsequent press conference from ECB Bank President Trichet for clues on upcoming policy decisions, and whether additional tightening can be expected.
We will continue to watch, learn, and wait for the dust to settle before venturing to make another prediction based on our models.
The one we are watching most closely is USD/CAD. It appears that after one more push upwards it will have finished a final 5 wave pattern upwards and be ready to fall quite strongly. The top will likely be 1.1830 - 1.1850. The current price is 1.1800.
The stock markets continue to fall:
The weekend may have offered a bit of a reprieve to the market's downside, but it didn't seem to turn the tide. Fasten your seatbelts, investors – it could be a bumpy ride. Futures have turned sharply lower in early trading, with the Dow Jones Industrial Average (DJIA) indicated below the 12,000 mark. The blue-chip index has not breached this century-mark threshold since early November.
Overseas Trading
Things aren't looking pretty across the globe; in fact, selling pressure has been fairly steady on the major foreign indices . Indices across Asia have dropped more than three percent, following Friday's weak session in the U.S. The Japanese Nikkei lost 3.3 percent in Monday's trading, ending its fifth losing session in a row, while the yen edged to a three-month high against the dollar. Tokyo's broader Topix index lost 3.4 percent on the day. An analyst based at Manulife Asset Management in Hong Kong noted that "There is a certain degree of panic in today's trading patterns," and added that there isn't a specific reason for the sell-off, other than the continued pullback in U.S. markets and possible unwinding of speculative positions.
European markets put in their worst week of trading in four years, and reopened on Monday with more of the same. Investors remain concerned due to mortgage-lending trends in the U.S, the strength of the Japanese yen, and Chinese stock valuations. The London FTSE 100 is currently down 1.6 percent and the French CAC 40 has slipped 1.7 percent. The German DAX is down 2.0 percent.
Yen Advances to Three-Month High as Investors Exit Carry Trade
By Min Zeng and Annie Pinkert
March 5 (Bloomberg) -- The yen advanced to the highest level in almost three months against the dollar as global stocks extended a slump, prompting investors to unwind riskier investments funded by borrowing in Japan.
The yen rose for a third day as investors exited so-called carry trades in which they borrow cheaply in Japan to buy higher- yielding assets elsewhere, taking advantage of the lowest borrowing costs among major economies. The currency reached its strongest since October against the pound and the highest versus the euro since November.
``Investors are cutting back their risk exposure,'' said Max Tessier, vice president of currency management at CIBC Global Asset Management in Montreal, which manages $2 billion in currency assets. ``Carry trade is running against investors. There is no argument to sell the yen right now.''
The yen rose 0.8 percent to 115.85 per dollar at 2:15 p.m. in New York from 116.80 on March 2. It touched 115.15, the strongest since Dec. 8.
The Japanese currency also advanced 1.5 percent to 151.76 per euro, from 154.10, after reaching 150.88, the highest since Nov. 24. The yen has rebounded from a record low of 159.65 on Feb. 23. The yen climbed 1.9 percent against the British pound, 2.3 percent versus the Australian dollar and 2.7 percent against the New Zealand dollar.
Traders who borrowed the currency to finance their investments in foreign corporate bonds and emerging-market assets had to buy back the yen to pay their debt financed in Japan, pushing the unwinding of the carry trade. The rise in implied volatility, a measure of how much investors expect the yen to fluctuate, also discouraged the carry trade.
U.S. Stocks
The dollar pared some losses against the yen after the Dow Jones Industrial Average rebounded and the U.S. benchmark 10-year government note erased an advance. This helped the U.S. currency cap its decline after a rout in Asian and European equities. The Dow Jones Stoxx 600 Index of European shares lost 1.2 percent.
The Dow average gained 0.2 percent to 12,138.53, rising from an intraday low of 12,039.11.
``There's a little bit of a relief rally in the Dow,'' said George Davis, chief technical analyst at RBC Capital Markets in Toronto. ``That's generating some short-covering'' in the dollar against the yen. A short position is a bet on a currency's decline.
The yen posted the biggest weekly gain since December 2005 against the dollar last week after proposed regulatory changes in Chinese equity markets sparked a rout of stocks worldwide, pushing investors to sell assets ranging from U.S. corporate bonds to emerging-market debt to repay loans in Japan.
Borrowing Costs
Japan's lowest interest rate among industrialized nations has encouraged investors to put on carry trades.
The Bank of Japan's interest rate is 0.5 percent, which compares with 5.25 percent in the U.S. and U.K., 3.5 percent in Europe and 7.25 percent in New Zealand. Japan's central bank boosted borrowing costs 0.25 percentage point last month. At 2 percent, Switzerland has the second-lowest borrowing costs among developed nations.
The Swiss franc, another funding currency for the carry trade, gained against the pound and currencies in New Zealand and Australia as people exited the investment.
``The yen will continue to strengthen over the next couple of weeks,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. ``The unwinding of the yen carry trade is yet to run its course.''
Implied Volatility
One-month implied volatility on options on the dollar versus the yen rose to 9.65 percent, the highest since June 5, from 8.48 percent on March 2.
The increase may discourage carry trades, as it implies wider exchange-rate fluctuation risk. The one-month implied volatility of yen against the euro and the pound also increased.
The yen will gain 2 percent this week against the dollar as Japanese investors switch out of foreign assets to take advantage of rising interest rates at home and reduce the risk of foreign- exchange losses, Standard Chartered Bank Plc said.
``Japanese money is definitely going home,'' said Singapore- based Callum Henderson, head of currency strategy at Standard Chartered. ``The spike in short-term Japanese rates will exacerbate the rally in the yen.''
The dollar pared some advances versus the euro after the Institute for Supply Management's index of non-manufacturing businesses dropped to 54.3 in February from 59 in the prior month. Economists in a Bloomberg survey expected the index to fall to 57.1. Readings above 50 signal expansion.
The Euro
The euro earlier fell against the dollar on speculation the European Central Bank will signal it's in no hurry to raise interest rates amid a global sell-off in stocks.
The euro dropped to $1.3096 from $1.3192 on March 2.
The ECB will increase borrowing costs by 25 basis points to 3.75 percent when it meets March 8, according to the median estimate in a Bloomberg News survey of economists.
U.S. Treasury Secretary Henry Paulson and Japan's Finance Minister Koji Omi discussed currencies and the stock market in Tokyo.
Paulson said, ``currencies should be determined by the market.''