The Carry trade is unwinding again…

So what’s in store for Sunday afternoon market opening? The JPY rallied like we haven’t seen since August of this year. Remember in one week in August we saw a 1600 pip drop in the EUR/JPY when the markets tumbled along with it.

It appears investors and traders are moving back into risk aversion mode which means moving away from things like the Carry Trade. Combine this with continued news about write-downs for lenders due to the ongoing concerns of the sub-prime debacle and we have a perfect storm brewing all over again.

What this means for the EUR and GBP versus the USD.

In essence what happens short term with these currencies is a strengthening of the USD. Investors/traders take profits out of the markets most often in the form of US Dollars so this tends to create an immediate short term strengthening of the USD. Let’s also remember that the USD is at an extreme against most of its counterparts so the timing of this may be another factor to consider.

And what of the High Flying Loonie?

Another incredible week for the CAD, setting more records in the process. What was very interesting on the CAD was the 250 pip movement in both directions in a single day. The downside is now starting to appear limited and if we haven’t yet hit the bottom we can’t be far off. This currency pair has been breaking all the rules technically and is due for at least a correction. What may buoy the Canadian is if Oil and Gold continue to soar. BUT… if they come off… the loonie could do a bit of a crash landing.

What to expect next week

We are moving closer to a reversal on most of the major trends. The question remains if we will see the pairs double top/bottom or if lows and highs are in place. Watch the opening of the Forex market Sunday afternoon for clues as to how the week may start. A sharp drop in the Asian markets could also signal more downside coming for the week on the European and North American markets. There are still many forecasts calling for $1.50 on the EUR so the larger turn might not happen until after we have hit this mark. What I expect if that happens is a very strong reversal shortly thereafter.

Have a great Memorial/Remembrance day.

Pierre Charlebois – VP Trading Solutions

Technical Levels