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Carrys unwind pose hedge correlated pairs concerns

Here are a few articles that will explains the drop earlier.

Source: forexfactory.com
By: Thomson Financial

Yen finds fresh legs as risk aversion spreads

LONDON (Thomson Financial) - The yen continued to benefit from a fresh bout of risk aversion in global markets, leading to some unwinding in the carry trade phenomenon which has been plaguing the Japanese currency.

Carry trades are funded in currencies with low yields such as the yen and moved elsewhere where yields are higher such as the Kiwi and Aussie dollars as well as the pound.

'Unwinding of carry trades is hitting the markets rather than the broad dollar-selling as the yen rallies across the board on emerging credit concerns in global credit markets,' said Ashraf Laidi at CMC Markets.

Laidi said today's move was a 'manifestation of a sharp reduction in global risk appetite emerging from worldwide concerns with hedge fund losses.'

To some extent economic data from outside Japan helped the process today. In the UK, where interest rates are at 5.75 pct and heading higher, home price growth stalled in June while in New Zealand, where rates are above 8 pct, the central bank signalled that borrowing costs may not have higher to go.

Also signalling the drop in risk appetite, equity markets were lower with the benchmark FTSE index in London and the DJIA index in New York both slumping over 200 points.

Weak data out of the US also added to the ramping-up in risk aversion, with the dollar also coming under pressure.

In particular, weak new homes data have helped to compound ongoing concerns about the sub-prime mortgage market in the world's largest economy, adding to the risk-averse sentiment in favour of bonds.

Sales of new homes in the US fell sharply for the second straight month to 6.6 pct in June, a level just a touch higher than a seven-and-a-half year low, to a seasonally adjusted annual rate of 834,000 units. Economists had expected a 905,000 unit rate.

'The new and existing home sales reports (released yesterday) are a clear wake-up call that the housing downturn still has a long way to go,' said Paul Ashworth, senior US economist at Capital Economics.

Durable goods orders data from the US also rose at a slower-than-expected pace in June, by 1.4 pct after falling a revised 2.3 pct in May. Economists had predicted a 2.0 pct.


Here's another one by NewstraderFX

Carry Trades Unwind as Bonds Are Bought and Equities Sell

Gobal yeilds are down across the board, as traders concerned about further subprime problems close out their risky positions. Yeild on the US 10y has lost 6 basis points so far today in early trading.

S&P Futures on the Sept contract extended their loss to 17 points from 14 points after the durable goods report was released. Core durables showed a decrease of -0,5% vs an expected 0.5% gain. The prior months number was revised to -0.2% from -0.4%.

European equities have had their worst day in over 4 months so far today.

The DOW is off over 200 points as yeild on the bechmark 10y has fallen to 5.81%, a clear sign investors are fleeing riskier assests (equities and carry trades). All ten of the S&P groups are down.

If things really start to go bad-they might pull the plug so we'll se what happens.

GBP/JPY is down nearly 400 pips on the day.

The DOW is off nearly 300 points so far on the day and yeild on the 10Y has gone to the lowest levels seen since May-below 4.8%.

It's likely that if US equities finish towards their lows for the day-Asian equities will follow suit and further unwinding of carry trade positions will occur.


And to borrow some quotes at Bloomberg:

Global Stocks Drop; Investors Shun Risk as Credit Woes Worsen


July 26 (Bloomberg) -- Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.

...The yen rose against all 16 of the most actively traded currencies as traders bought back yen used to finance investments outside Japan.


And from CNBC headliner:

Selloff in Stocks Picks Up Steam; Dow Sinks As Much as 440

Stocks plunged further after disappointing news from the housing industry prompted heightened concerns about credit markets and the U.S. economy. "We don't know how bad this will be," said David Kotok, chief investment officer at Cumberland Advisors. "We do know that it's bad and it's accelerating to the downside."


EUR/CHF dropping more than 120pips on a single day is very unusual, there is definite abnormality that is going on in the market. Not even expert financial analyst can predict how far down those carrys can go. I'll make some sacrifice loss tomorrow if I had to.

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