Massive Bank Losses And Write Downs Drag Risk Appetite And Carry Lower

The high end of the yield curve has taken a significant hit over the past week; and carry trades have suffered the consequences. The DailyFX Carry Trade Index sunk $298 dollars since last Friday after failing to over take a descending trendline that has been directing the basket since risk appetite was tripped up by the subprime meltdown last summer. In turn, a breakdown in USDJPY and other yen crosses has weighed on risk reversals, which show a greater demand for puts. However, during this reversal, the outlook for a BoJ hike over the coming year has eased and volatility cooled, suggesting this will be a more orderly (and perhaps short-lived) carry unwind.

·         Massive Bank Losses And Write Downs Drag Risk Appetite And Carry Lower

·         Fed Increases Its Bi-Weekly TAF Auctions And Broadens Acceptable Collateral

·         High Yield Currencies Plunge Across The Board As Economic Conditions Dim

The high end of the yield curve has taken a significant hit over the past week; and carry trades have suffered the consequences. The DailyFX Carry Trade Index sunk $298 dollars since last Friday after failing to over take a descending trendline that has been directing the basket since risk appetite was tripped up by the subprime meltdown last summer. In turn, a breakdown in USDJPY and other yen crosses has weighed on risk reversals, which show a greater demand for puts. However, during this reversal, the outlook for a BoJ hike over the coming year has eased and volatility cooled, suggesting this will be a more orderly (and perhaps short-lived) carry unwind.

There were few market factors working in carry’s favor this past week. The most prominent element to the strategy’s performance came towards the end of the week when major financial firms Citigroup and AIG announced considerable losses and write downs. Perhaps taking the SEC’s new policy for companies to disclose their liquidity and capital positions to revive confidence in the financial markets, Citi took the unprecedented move of announcing plans to sell $100 billion in non-core businesses and $400 billion in low-yielding assets over the next few years to boost its capital position. This ‘write down’ accounts for more than 20 percent of the entire company. Another major weight on the carry basket came from a series of bad data from the high yielders. The most significant hit came from the New Zealand employment number, which dropped the most in 19-years. Amidst this heavy-handed data however, the Fed was once again the silver lining. The policy authority announced it would expand its TAF auctions from $50 to $75 billion and accept asset-backed debt.

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