As would be expected, with this big rally in the yen crosses, we have seen the carry index surge. We are definitely not out of the woods yet; but this does give the market some buffer room. To see a true turn around, we need a genuine rebound in sentiment and not merely a rally in risk sensitive assets that is driven by momentum.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Any sign of optimism that is able to bubble up in the markets recently has been consistently battered down by fading returns and the constant sense of risk looming over investors heads. And, holding to this bound sentiment, the rallies that equities, investment grade bonds and the yen crosses were able to develop just a short time ago were smothered this past week despite (or perhaps because of) the US government’s expansion of its Financial Relief Program and passing of a massive economic stimulus package. Nonetheless, the limbo in sentiment and congestion in carry interest that has developed since the massive plunge through October may finally be forced into direction if the patterns in USDJPY and the DailyFX Carry Trade Index play out as expected. Looking at the Carry Index, a clear descending wedge formation has developed and the most recent failure to recharge yield demand has further confirmed the dominant bear trend behind the market. The same pattern can be seen in USDJPY, though there is more pressure for a trend reversal with this risk-sensitive pair heading into the weekend. As the market prepares to take direction (and perhaps redefine its long-term trend), it is important to take note of condition indicators. Access to credit, options positioning and volatility have all shown improvement recently.

It is fitting that the technicals are demanding a resolution on risk trends just as fundamental activity is picking up. However, economics and policy do not exactly sync up to the potential for a bullish reversal seen in the yen crosses. Over the past week, the best potential catalyst for optimism failed to spark confidence in the financial system and economy. In an effort to speed up their response to the unfolding crisis, US Treasury Secretary Timothy Geithner expanded efforts to stabilize the domestic credit market (by proposing a joint private/public fund to absorb toxic assets and increasing the capital used to opening credit to consumers and small businesses) while the US Congress made its final tweaks on a $787 billion stimulus plan. These policies were initially met with skepticism as investors and lenders looked back to the failure of so many other liquidity injections, bailouts and guarantees before this round. On the other hand, it is notable that the market has not seen another wave of pessimism sweep over it during these months when capital and sentiment have been sidelined. Taking weight of the fundamental scales, we have seen growth readings plunge through fourth quarter readings; and forecasts for activity through the first half of 2009 look to tip economies into severe recessions (and some even speculate, depressions). On the other hand, there is evidence that the financial markets have stabilized, stimulus and bailout efforts have taken to the global stage, and a few major economies are already looking at recovery. However, at this point, the future lies with sentiment. Consumers, investors and lenders can turn the global economy around, but only if they work together.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Interesting stuff in risk trends this week. The DailyFX Carry Index is looking very similar to the wedge formations in EURUSD and USDJPY as well as in equities and commodities. I don't think this is a coincidence.

For currencies though, is the dollar still a safe haven candidate (trying to replace the Japanese yen) or are traders more concerned about long-term growth (with the US already ahead the curve on its slump with very promising bailout efforts by its own government)?

Anyone have any opinions on the matter?

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

I put together a broad risk report. Anyone have any comments on it?

I tried to pull in measures for gauging risk in currencies, equities, debt, money and commodity markets.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

China said they would stock pile commodities a month or two ago. They are doing exactly what they said they would and that inflow of cash into commodity based countries seems to be a stabalizing force for the carry trade. I hear people talking about a seasonal repatriation of JPY cash, but I would think that the extreme negative GDP figures in Japan might overwhelm this.

The Economist magazine has a cover this week titled "The Collapse of Manufacturing". That makes me feel a little more confident being long AUDJPY. I like this nice long base and triangle formation. What is the largest downside risk for this currency pair? Am I too early?

China's buying spree in global fire sale | csmonitor.com

This has to be of great help to commodity currencies as China uses their $2T in foreign reserves.

Not exactly candle analysis but I believe worth while...all my best..Joel

We often use “Average True Range” (ATR) in our daily analysis and place the indicator at the top of our list as an invaluable technical tool that provides compelling insights into market price action and potential reversals. The concept of the ATR is simple. The indicator calculates what the daily average true range of a specific security will be based on a calculated average of the previous days’ ranges. As applied to Eur/Usd today, we can see that the market had established a low by 1.2765 early on and began to rally. If we were to utilize ATR as a means of projecting/forecasting where the daily high could be today, we would have simply looked at the daily ATR of 226 pips and added it to the current daily low of 1.2765 to give us a projected high of 1.2991. Based off of our chart, the rally extended and hit a high of 1.2993 (just 2 pips over the projected ATR) before pulling back sharply to current levels by 1.2800. We will often look to use ATR in this way while also looking for other key levels that coincide by the projected ATR to provide a solid technical confluence to base our trades off. Today, the other indicator was the psychological resistance by 1.3000. Therefore, with a projected ATR of 1.2991, just shy of critical psychological barriers, would have made for an excellent short entry back into the overriding bearish trend.

I agree. There are always a million factors that play out in pricing an exchange rate; but I think that we can splice it into a few important ones for each pair. For AUDJPY, you have realistic flows such as resource utilization, natural investment flows, foreign consumption; but then you always have the speculative lean. Speculative capital is enormous and it doesn't necessarily have to concentrate on the most intensive flows from the 'necessary' category.

What are traders and market participants interested in now? Carry is being held down by risk; and even when fear lets up, we will still have very low potential for returns thanks to the sharp drop in global rates. I guess the same can be argued for in terms of growth. However, I think that speculation surrounding the turn in growth will be more immediate and pervasive. So, I agree with you that AUDJPY will be driven by growth factors and not carry.

I am actually putting together an article about how Japan may be losing its carry status. It should be on DailyFX this week.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Hi All,
I was looking at the NZD/JPY overnight and the pair looks to be holding short-term resistance at 50.20-30 (50.0% Fib of 44.24-56.32), and despite the sharp rally in the USDJPY, the kiwi-yen looks like it will continue to hold its broad range over the near-term. By the looks of it, a strong argument could be made that it may be a little to early to jump into carry trades, but nevertheless, we have seen yen crosses come under considerable pressure so I will keep an eye out for further confirmation before I commit myself to a trade.

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It is interesting to consider what may be considered a carry trade now a days. So many rates are so close to zero now that there is little room to make the differential. And, considering the volatility still engrained in price action, the risk may still outweigh the reward.

However, price action is starting to settle down. The worst of the interest rate cuts have likely passed. I think we will start seeing investors look not only for yield now; but where yields my rise very soon to encourage capital gains along with the differentials through money market income.

I'm thinking EUR, AUD and NZD are positioned as the best carry currencies going forward; while JPY, CHF, USD and GBP are going to be the funding currencies thanks to their flooding their respective markets with currency.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Ah....but which is the best carry currency going forward? I am betting on the JPY and CHF though I am spread across all of the pairs you mention.

It seems highly unlikely that EUR will ever get to the point of raising rates again for many years to come.

I think it will be the JPY. The Fed said they would keep their target rate at exceptionally low levels for an extended period; but they are eventually going to turn things around to snuff out any aggressive recoveries that look like bubbles. The franc will be a close contender thanks to their policy activity putting so much capital into their system and the world's investors parking their funds in Swiss banks. But, when all is said and done, Japan has long struggled. They have excess money floating around the economy; local investors put their money to work outside their own economy thanks to their lack of returns and they are stuck at perpetually low interest rates until they can overcome their cycle of capital market troubles.

You don't think the ECB would return to raising their benchmark interest rate? They do have trouble in their financial sector and growth is certainly lacking; but things turn around fast in many of their member (Spain, Italy) economies and it will help catalyze regional growth.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Earlier this week, the AUD/JPY surged to a fresh 2009 high of 69.64 on the 24th, and may continue to push higher over the near-term however, after ending the day lower, it looks as though the pair may trade sideways over the near-term, and may continue to find resistance at at 70.00-10 (78.6% Fib). Moreover, the NZD/JPY reached a fresh high of 56.95 during the session but as both of the pairs remain oversold, we may see a corrective retracement unfold over the following week.

It seems highly unlikely that they will raise rates for many years to come. There is too much manufacturing capacity out there. Europe has worse demographics than the U.S., and in my view this will translate to low interest rates for many years to come. Deflation is a threat.

Spain does have good demographics going for and France has somewhat better demographics than the rest of the Eurozonone, however I doubt that is enough to compensate for weak demographics in the rest of the Eurozone.
Adding Turkey to the Eurozone would help.


The world is in a deflationary spiral.

The Euro Zone's existence as a group of members is certainly showing through in their political and economic health as of late. It is very difficult to regulate and help recharge a financial system and economy that is comprised of so many, very different authorities. This may very well hold the euro zone's yield down for quite some time. But, then who do you think will have a high yield 6 month to a year from now?

My vote is with Australia and Canada among the majors. I thin the Scandi currencies, South Africa and a few of the free-float Asian currencies with a high correlation to Chinese demand (not Japan) will all be leaders for growth and therefore interest rates.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com