Tuesday, February 27, 2007


Carry Trade Worries Roil Markets

MarketWatch reports on the currency markets. "The yen rallied across the board Tuesday, gaining more than 2% to trade at a two-and-a-half month high against the dollar, as a rise in risk aversion triggered by an almost 10% slump on the Chinese stock market overnight encouraged traders to unwind carry trades."

" Meanwhile, the dollar fell to a two-month low against the euro on fears of the potential knock-on impact from subprime lending market woes and worries over Iran's nuclear plans. The greenback extended its losses after a government report showed larger-than-expected declines in orders for new U.S.-made durable goods last month."

"'A number of issues, such as Iranian tensions, the weakness in the U.S. subprime mortgage market and, most recently, a slump in Chinese shares all seem to have increased risk aversion,' said David Brown, an analyst at Bear Stearns. 'The recent focus on carry trades seems to have made it abundantly clear that rising risk aversion should be associated with a higher yen.'"

"In New York trading, the dollar was quoted at 117.93 yen, compared with 120.74 late Monday, after falling to an intraday low of 117.46 yen, the weakest since Dec. 15. The euro stood at $1.3251, compared with $1.3182. It had earlier risen to $1.3259, the highest level since Jan. 3."

"The British pound traded at $1.9648, compared with $1.9616. The dollar changed hands at 1.2165 Swiss francs, compared with 1.2317 francs."

"'If U.S. data continue to disappoint, the greenback may find itself in the unenviable position of being sold against the yen on further carry trade unwinding and sold against the euro on the impending [European Central Bank] rate hike,' said Michael Woolfolk, senior currency strategist at The Bank of New York."

"The dollar fell after the Commerce Department said new orders for U.S.-made durable goods plunged 7.8% in January as nearly every category of manufactured goods declined. The drop was the largest since October and exceeded the 5.5% decline expected by economists surveyed by MarketWatch."

"'Nothing in this data is dollar friendly,' said Kathy Lien, chief strategist at DailyFX.com. 'As a component of gross domestic product and a forward looking indicator for consumer consumption, the weak demand for big ticket items could start to trigger some concerns about the sustainability of the U.S. recovery for members of the Federal Reserve.'"

"'Today's durable goods number will fuel even more speculation that the recession [former Federal Reserve chairman Alan] Greenspan warned about this weekend could actually become a reality,' she said. 'The combination of low inflation, softer growth and problems in the subprime lending will make it difficult for the Federal Reserve to raise interest rates again this year.'"

"The yen was also boosted by news that Rodrigo Rato, managing director of the International Monetary Fund, warned that carry trades 'could lead to more entrenched exchange rate misalignments that worsen global imbalances.' Rato also said that while the size of carry trades was unknown, there was no 'simple solution' to the problem."

"In other trading, major emerging-market currencies came under heavy pressure on growing risk aversion among investors. The Turkish lira tumbled almost 3% to 1.4030 versus the dollar. The South African rand fell 1.9% and the Brazilian real dropped 1.2% versus the dollar."

"Gold futures closed lower Tuesday for the first time in three sessions on concerns that China's demand for commodities may weaken, and price losses worsened in electronic trading after U.S. stocks logged their biggest one-day loss in more than five years."

"The plunge sent many metals-mining shares to their lowest levels in a month.
Gold futures for April delivery closed down $2.60 at $687.20 an ounce, staging a partial recovery from a low of $677.50. It climbed as high as $692.50 during the session to mark a fresh seven-month, intraday high."

"Then in electronic trading, the contract touched a one-week low of $660 following a more than 500-point drop in the Dow Jones Industrial Average. 'A massive U.S. stock market meltdown affected gold prices in after-hours electronic trade,' said Jon Nadler, an analyst at bullion dealers Kitco.com."

"There's 'no question that a flight to liquidation in equities should help gold eventually, but the normal pattern of initial selling of assets across the board in a plunge of this type does impact gold on the negative side,' he said."

"On Monday, April crude closed at its highest level since July as continued defiance by Iran over its nuclear program underscored the metal's safe-haven appeal. Prices gained $6.80 over the past two sessions."

"China was a key theme Tuesday after the Shanghai market closed down almost 9% overnight, its biggest single day decline in a decade. Concern that the government is planning restrictive measures to address fears of a bubble in the stock market and hints from the head of the central bank that it may tighten policy triggered the move."

"'A major downturn in Chinese equities markets and/or the Chinese economy could immediately and significantly affect the equally red-hot commodities sector (base metals, industrial materials, etc.),' said Nadler. 'It could also affect some of the major global economies, that of the U.S., perhaps the most,' he said. 'Gold would likely not be immune from a large-scale decline in its own market sector 'backyard'.'"

"Still, 'in regards to the Chinese economy, let us not forget how many episodes we have gone through such speculation over the past few years,' Peter Spina, chief investment strategist at GoldSeek.com said. 'Until this event takes place, I would not throw all my weight behind such an occasion.'"

"The action in the electronic-trading market is the thinnest traded market in metals, said Neal Ryan, director of economic research at Blanchard. 'So if everyone's in a panic-selling mode for whatever reason, it'll show up as being most influential on the price.'"

"'After the savvy traders have a chance to look back at what's happened in the last 24 hours and why, I think they'll see the downtrend for the dollar has started again after trading sideways the last year,' he said. 'And the powers that be will begin chatter about the U.S. cutting rates or at least [Federal Reserve Chairman Ben] Bernanke and Co. will comply enough to say that a possible rate cut is now on the table,' he said."

"In Tuesday's regular session, May silver managed to nearly recover from a drop to $14.42 an ounce to close at $14.69, down 14.2 cents. June palladium fell by $4.90 to close at $356.60 an ounce but April platinum closed $11.30 higher at $1,253.30 an ounce."

Once again we're looking at the now-common weirdness of dollar uncertainty coupled with declining gold prices. And the equity markets are down at the same time. Go figure.

If this plays out like I'm guessing it will, gold and silver will follow the market down and enjoy a faster bounceback. Of course, calling the bottom is going to be tough in market as overinflated as China's.

It sure would be nice if PM's behaved like the dollar hedge they're supposed to be (for a change).
Ben, the blogger search only works on topics and not comments. Does it allow you to search comments?
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