Expert Analysis of Today's Market

Carry Trades Continue in Volatile FX Market

Hans Nilsson 2007-09-04

The dollar was little changed on Tuesday. The yen reversed overnight gains after US stocks rose. Carry trades continue as the main feature in the volatile FX market.

After its peak in July, the EUR/JPY has since been in a downtrend. The pair has retraced about 50% of the differences between July’s high and August’s low. If the resistance in the 160-area and the downtrend are broken, the pair will rally. The other carry-trade pairs (e.g., GDP/JPY, USD/JPY and AUD/JPY) look similar and will take their cues from the risk propensity and outlook for the equity markets.

Financial and Economic News and Comments

US & Canada

US manufacturing grew at the slowest pace in 5 months in August as companies reduced orders after borrowing costs rose. The ISM index of manufacturing activity fell slightly more than expected to 52.9 in August from 53.8 in July, the Institute for Supply Management reported. A reading above 50 indicates an expansion of manufacturing activity.

US construction spending in July unexpectedly dropped 0.4% at a seasonally adjusted annual rate of $1.169 trillion, after a revised 0.1% increase in June, the Commerce Department said.

Europe

The European Commission left unchanged its forecasts for economic growth in the eurozone over the next 6 months. The Commission reaffirmed its August forecasts that the 13-nation eurozone would grow between 0.2 and 0.8% in Q4 2007. For Q1 2008, the Commission forecast the eurozone economy would grow between 0.2 and 0.9%.

Asia-Pacific

Australia’s economy grew faster than expected in Q2 as business investment surged. Australia’s Q2 GDP rose 3.8% q/q at an annual rate and 4.6% y/y, the Bureau of Statistics said. The fastest year-over-year growth since Q4 2003 raised speculation the Reserve Bank of Australia will raise interest rates again. However, the RBA is expected to keep the benchmark interest rate unchanged at its rate decision announcement tomorrow. The implicit price deflator for GDP slowed to 0.4% in Q2 from 0.7% in Q1.

FX Strategy Update

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