By DailyFX – Big Rally in Carry Trades and Dow Despite Bad Data: What is Happening? Carry trades rebounded strongly… … as the Dow came close to erasing all of Tuesdays losses.

The only piece of economic data released from the
US was mortgage applications which dropped for the second week in a row.
Any news from the financial sector only provided more cause for
concern. UK hedge fund Cheyne Financial may be forced to liquidate up
to $6B in assets due to losses in the commercial paper market while
Basis Yield Alpha Fund filed for bankruptcy. Everyone is also beginning
to shift their focus to this quarters earning releases. Moodys and
Standard and Poors both warned that banks could suffer double-digit
losses due to falling revenue and big write offs. So why has the Dow
rallied so much today? There are only two real explanations. The first
is that the market expects tomorrows second quarter GDP report to be
revised up sharply. Although a valid reason, the backward looking GDP
report does not reflect the recent turmoil that we have had in the
financial markets. The second explanation is Bernankes comment that
there is no need to lift portfolio caps on Fannie Mae and Freddie Mac.
This could suggest that the Fed has other ways to boost growth and may
not need to resort to raising portfolio limits on GSEs. The lower
volume in the market is also contributing to the unusual swings in the
currency and stocks markets and because of this, it is not time to
become complacent. The problems are increasing as risks continue to
grow, but traders are simply ignoring them. Judgment day will come
after the Labor Day holiday in the US. The slide in the dollar today
indicates that risk appetite is returning, but for the time being, the
downtrend in most of the high yielding currency pairs remains intact.
The rallies that we have seen so far should only be perceived as a
rebound within an overall downtrend.

Euro: Watch for a Break of 1.37
Even though the Euro started the week on a softer footing, it has now
recovered close all of those losses. German and French unemployment
numbers are expected to be strong tomorrow even though retail PMI across
the region should be weak. German consumer confidence has already
deteriorated for the month of September. However these economic releases
will most likely be only secondary triggers for moves in the Euro.
Instead, all eyes will be on US data, the credit markets and any
comments from ECB officials. So far, the central bank has kept us
guessing on what to expect in September. Meanwhile the Swiss KoF
leading indicators report deteriorated from 2.09 down to 2.06 in the
month of August. Swiss economic data has been on a downtrend, which
suggests that the central bank will leave interest rates unchanged next
month.

British Pound: A Puppet of the Risk Appetite
There was no economic data released from the UK today and the only news
out the country was a bad one since Cheyne Financial is a UK based hedge
fund. Yet, the British pound rose strongly against the Euro, US dollar
and Japanese Yen which means that the currency was nothing more than a
puppet of global market risk appetite. Tomorrow may be a bit different
however with Nationwide house prices, consumer credit, mortgage lending,
money supply and the CBI distributive trades survey all due for release.
Housing market reports should be a bit softer after the drop in
mortgage approvals reported yesterday. Meanwhile keep an eye on the CBI
survey since it tends to be a good leading indicator for retail sales.
Both of these reports are expected to be weaker which means that the
British pound could give back some of today’s spectacular gains.

Yen Selling Resumes Once Again
The currency market seems to be extremely schizophrenic at the moment
as they love the yen one minute and hate it the next. Over the past few
days, the Japanese Yen crosses have been swinging 10 to 20 pips at the
blink of an eye. This may of course be due to lower volume, but at the
same time, it is also due to uncertainty. Traders are waiting for the
next shoe to drop and depending upon whether that will comes in the form
of another big blowup or an interest rate cut by the Federal Reserve
first will determine where the Yen crosses are headed next. For the
time being, we prefer to err on the side of caution and avoid jumping
into the carry trade. Meanwhile Prime Minister Abes Cabinet Shakeup
has helped to boost his approval ratings significantly. For the first
time since May, his approval ratings were above 40 percent. Japanese
retail sales are due for release tonight along with small business
confidence. Both figures are expected to be weak.

Demand for High Yielders Drive Australian, New Zealand and Canadian
Dollars Higher
Renewed demand for high yielding currencies as well as rebounding oil
and gold prices have driven the Australian, New Zealand and Canadian
dollars higher. Australian new home sales and construction work data
was tepid, but that seemed to matter little to the currency market.
Instead traders revealed in higher oil prices after the larger than
expected drop in crude inventories and in the markets overall demand
for yield. Over the next 24 hours, we are expecting a lot of data from
these 3 countries. Australia will be reporting its current account
figures, New Zealand has its money supply and business confidence data
while Canada has industrial and raw material prices along with its
current account balance; expect these currencies to be in play tomorrow.
Meanwhile Australia and New Zealand could weather the US slowdown
better than many people may think. The Baltic Exchanges Dry Freight
Index was once termed, the Best Economic Indicator Youve Never
Heard Of by Daniel Gross hit a record high today. This indicates
that there continues to be huge demand for raw materials from countries
like China and India. This could provide the support that these
commodity rich countries need

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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