aud fundamentals

Carry Trades Rocket Higher, Benefiting the Australian Dollar While Killing the Japanese Yen

Tuesday, 04 November 2008 20:50:39 GMT  |  Terri Belkas, Currency Strategist

When you see a currency rally despite a sharp rate cut by its central bank, there’s a good chance you’re witnessing some sort of change in trend.

Last night the Reserve Bank of Australia cut rates more than expected by 75bps to 5.25 percent, and as Currency Analyst Ilya Spivak pointed out, RBA Governor Glenn Stevens sounded ominous in the statement accompanying the decision, saying that "it appears likely that spending and activity will be weaker than earlier expected." This sort of commentary suggests that the RBA will continue cutting rates in coming months, yet, after a brief 100 point drop, AUD/USD rallied from 0.6600 to 0.7000 over the course of European and US trading. Why? Increased risk appetite. We witnessed this dynamic throughout the financial markets as risky assets like stocks and forex carry trades soared, while safe-havens and low-yielders like the US dollar and Japanese yen faltered. In fact, both the greenback and yen ended the day approximately 4 percent lower versus the high-yielding Australian dollar, and there is potential for this sentiment to feed through into the Asian trading session tonight. However, traders should beware as these moves could easily reverse on any signs of marked risk aversion.

Related Articles: Australian Dollar Looks To RBA Rate Decision For Direction, Japanese Yen May Lose Ground As Risk Aversion Settles

Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

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