Vigorous Unwind Of Forex Carry Trades

What a gap in performance that has opened up between 'the funding currencies' and 'the higher yielding' complex! The aggressive unwind of carry positions currently underway came as the VIX, also known as the 'fear index' reached its highest level in over 2 years at a time when the rout in equities accelerated vigorously. For a full round-up, keep reading...

Quick Take

Today’s aggregated G8 FX indices chart leaves no doubt, the torrid market conditions out there, with the S&P 500 shaving over 10% from its all time high, suggests the hold of carry trades has become way too risky. The immediate ramifications of this aggressive unwind is to witness funding currencies the likes of the Euro, the Yen and the Franc flying in style. It’s simply not the time to keep carry-trade exposure when we’ve had the worst week in US equities since the GFC and the VIX at a 2-year high. One can see in the chart below the considerable gap that has opened up between ‘the funding currencies’ and ‘the high yielding complex’ with the Canadian Dollar by a country mile the most punished. I salute you with huge respect if you’ve been able to capitalize it through EUR/CAD longs. What a move! When looking at the Aussie and Kiwi, it’s the same old story, with sellers firmly in control. Make sure you visit the ‘insights into charts’ section for an opportunity to explore the smart money footprint in the Oceanic currencies as short-inventory keeps being built. In this environment of funding currencies thriving, USD longs were too schooled not to marry to a single direction, in this case longs, despite the 2020 bull trend is still in place. Lastly, the Pound remains unloved as the political brinkmanship by UK PM Johnson with the EU ratchets up.

(Click on image to enlarge)

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports.

COVID-19 monopolizes the narrative: This will remain the case for some time, as the terrifying prospects of a world economy brought to a standstill creep in. Overnight, the trend of COVID-19 spreading into the West kept playing out, with more cases popping up. France has now over 40 new confirmed cases, a total of 14 in the German state of Nord-Rhine Westphalia, while Italy has now over 700, with 17 confirmed deaths. Worse yet, California is monitoring 8,400 people after 33 cases were identified in the state. Read a summary here via ZH.

WHO’s Tedros warns of ‘decisive point’: The head of the World Health Organization Mr. Tedros said that the coronavirus outbreak has reached a “decisive point” and it has “pandemic potential”. Dr Tedros urged governments to act swiftly and aggressively to contain the virus. "We are actually in a very delicate situation in which the outbreak can go in any direction based on how we handle it," he said. "This is not a time for fear. This is a time for taking action to prevent infection and save lives now," he added. More on what Tedros said via the BBC.

Equity meltdown resumes: The low conviction to gain back risk exposure in equities translated in a short-lived attempt to rebound before indices in the US succumbed another 3 to 4% heading into the close, with the S&P 500 more than 10% off its record highs. The US fixed-income market continues to be the place to park one’s money as seen by the unstoppable falls day after day. One of the main catalysts for the resumption of the bear trend in stocks was a headline that the New York State health Department asked 700 people to self isolate for 2 weeks.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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