Carry Trades Rebound

The dollar's rebound stalled in the Tuesday session, relinquishing the 2.07-level against the British pound as traders jumped back into US equities while propping up the carry trades. The moves in the currency market remain closely linked to risk aversion thus warranting particular attention to any new revelations from the subprime meltdown and global equity bourse moves.

Economic data due out from the US tomorrow will see retail sales, PPI and CPI. It will be important to gauge the impact of the deteriorating housing market on the US consumer to determine the extent of any spillover effects on consumption. Retail sales for October are seen down at 0.2%, while the excluding autos figure is down 0.3%.

The Bank of Japan, as expected, left monetary policy unchanged at 0.5% when it announced the results earlier in the session. The Bank voted 8-1, with BoJ Board member Mizuno voting against the unchanged decision. BoJ Governor Fukui stressed that “if adjustments in the US housing market worsen and negatively affect private consumption and capital investment, the global economy would deteriorate”, which would inevitably be detrimental to Japan’s economy. Further, Fukui said that market adjustments have been within the bank’s assessment, adding that there is no preset schedule for future policy tightening. We continue to expect the BoJ to leave policy unchanged for the remainder of the year and do not anticipate any changes until Q2 2008.

Japan PM Fukuda expressed concern over the yen’s valuation, deeming recent appreciation as too fast and cautioning speculators. Fukuda said the yen’s strength poses a problem for the short-term, adding that any sudden change in exchange rates is undesirable. The jawboning is unlikely to deter speculators from dumping carry trades during periods of heightened risk aversion, the primary source of strength for the yen.