A stunning collapse in global equity markets which saw Nikkei drop by -535 points, Hong Kong sink by -1383 points and the DAX lose more than -400 points in early European trade,
â€˘ Japanese Yen: Breaks 106 as Asian equities plunge
â€˘ Euro: Below 1.4500 as risk aversion dominates
â€˘ British Pound: Holds 1.9500 as M4 growth above 12%
â€˘ US Dollar: MLK holiday
A stunning collapse in global equity markets which saw Nikkei drop by -535 points, Hong Kong sink by -1383 points and the DAX lose more than -400 points in early European trade, triggered massive carry trade liquidation in the currency markets with EURJPY losing nearly 300 points before the North American session even opened for dealing. As a result EURUSD was battered as well, slipping below the key 1.4500 figure for the first time since December 27th of last year as it absorbed relentless waves of selling from speculators unwinding the carry trade.
Tonightâ€™s panicked selling across the worldâ€™s major capital markets is a clear sign of fear by international investors that a recession in the US will likely produce a global economic slowdown and will necessitate a re-pricing of all risky assets. The fury of this move is beginning to rival the volatility of late August of 2007 and may be complicated further by the fact that US session will have very limited liquidity because all major financial markets will be closed for Martin Luther King Day.
Itâ€™s difficult to gauge if the holiday close of the US markets will actually help to temper the volatility as US investors have the benefit of another day to consider the situation or if the forced respite will only exacerbate matters as pent up sales demand hits the tape tomorrow. If history is any guide US stocks will likely open substantially lower tomorrow as investors adjust to the moves in Asia and Europe.
In short, if the financial panic continues we are likely to see more of the same in the currency market. As we noted in our weekly, â€śIf equities continue to decline, expect the greenback to strengthen further.â€ť Paradoxical as it may seem, a crash in equities is proving to be the buckâ€™s best friend.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]