The US dollar faces substantial event risk, but this week is a bit different from others as the release of economic indicators may prove to be rather unimportant. Instead, the greatest threat to the US dollar is the fate of Fannie Mae and Freddie Mac. Shares of the two mortgage giants plummeted after Friday’s stock market close amidst speculation that the US Treasury will announce plans to inject capital over the weekend.
Carry trade has a successful track record that goes back more than 25 years. However, a massive shift in today's complex financial markets towards risk aversion is not only questioning the logic of this type of absolute return strategies but also threatening the survival of many carry traders.
The dollar continues to gain but the USDJPY break below a supporting trendline suggests a bigger bear move for the pair.
The health of the carry trade is dependant on a foundation of high returns (wide yield differentials) and low volatility (or perceived risk). Considering the outlook for global interest rates has plunged over the past weeks and broad fears are growing out of a global slowdown in growth and lingering threats to the financial system, it makes sense that the carry trade has tumbled recently.
US dollar holds strong despite disappointing NFPs, jump in unemployment rate to 6.1%. Forex traders look ahead to RBNZ rate decision, US retail sales, and news this weekend from the Treasury regarding Fannie Mae and Freddie Mac.
Currency Strategist