Forex traders sold US Dollars and Japanese Yen following this weekend’s G7 summit in Washington, DC as the finance ministers from the world’s top economies surprised the skeptics, coming together to issue a joint 5-point plan aimed at freeing up the gridlock in global credit markets.
Sweeping panic across markets has seen traders liquidate carry trades funded with low-yielding currencies in recent weeks, making the Japanese Yen exchange rate a direct reflection of traders’ risk sentiment. Meanwhile, the greenback had gained in spite of shaky US fundamentals as investors spooked by risky market conditions abandoned stocks and other higher-risk assets to flock to long-term US Treasury bonds. Indeed, we have previously noted that the US dollar had become over-80% correlated with the 30-year “long” bond. The G7 communiqué revealed a sweeping 5-point plan to restore confidence and reboot credit markets. In plain terms, policymakers agreed to:
1. Prevent the failure of key financial institutions 2. Pump more money into the credit markets 3. Boost banks’ access to public lending 4. Offer insurance and deposit guarantees on private bank deposits 5. Where necessary, have governments step in as buyers in mortgage markets (as in the recently passed US rescue plan)
The European Union, Australia and New Zealand wasted no time, moving to implement the measures almost immediately following the meeting. The antipodean nations announced they would guarantee private bank deposits, while European officials also added permissions for governments to buy shares in banks and “recapitalize” (i.e. bail out) any banks deemed too big to fail. Current market conditions appear to indicate a turning point: Australia’s benchmark stock index (the first major exchange to begin trading after the weekend) is up nearly 6% while US equity index futures are up about 3.5%. Meanwhile, the aforementioned correlation between the US dollar and the 30-year US Treasury Bond came down to 81% having peaked at 84% last week. Related Articles: Forex Trading Weekly Forecast - 10.13.08 G7 Issues Joint Statement On Addressing Financial Crisis