Not only did US equities rise to the highest level since July 27, but they also saw the largest percentage move since 2003. Rate cuts are generally good for the stock market, which is why the response by carry traders has been so positive. According to CNN Money, since 1945 the S&P 500 rallied 7 out of 11 times in the six months after a rate cut. On average, the rally was in excess of 12 percent. So far, the Dow has only rallied 2.5 percent, which means that there could be more room to go. Therefore if you believe that the Dow is headed higher then you also believe that carry trades will continue to rise. Meanwhile the Bank of Japan is expected to leave interest rates unchanged tonight; no surprises are expected there.
Written by Kathy Lien, Chief Currency Strategist of DailyFX.com