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Carry Trade Reversal Pressuring Equity Markets

James Hyerczyk from ForexHound.com at 12/04/09


U.S. equity markets are under pressure this morning following a better than expected Non-Farm Payrolls Report. This morning the government reported a surprise drop in the unemployment rate to 10 percent. Pre-report estimates were for the unemployment rate to remain unchanged at 10.2 percent. In addition, the total jobs lost came in at 11,000, well above estimates of 125,000. The October job loss was revised lower.

Traders initially bought stocks on the news but turned into sellers on the thought that the better than expected report could lead to the Federal Reserve raising interest rates sooner than previously estimated. The possibility of the Fed raising rates is encouraging currency traders to reverse carry trade positions. This is putting the pressure on stocks as investors sell equities to raise the cash to pay off borrowed Dollars.

The December E-mini S&P 500 rallied to a new high for the year at 1119.00 just short of a major 50% level at 1122.00. The subsequent break from this high helped the market find support at a short-term retracement zone at 1098.50 to 1093.50. Watch for a closing price reversal top today.

The December E-mini NASDAQ also made a new high before selling off. 1779.00 to 1770.25 is new intraday support. A close under 1759.25 turns the market lower for the week.

The December E-mini Dow eked out a new high at 10509 before getting hit by selling pressure. Look for intraday support to form at 10357 to 10321.

Yields rose sending March Treasury Bonds and March Treasury Notes sharply lower following the better than expected U.S. Unemployment Report. Investors are adjusting positions to accommodate the possibility that the Fed will begin pulling stimulus and raising interest rates sooner than previously estimated.

The inability to break through last week’s high at 1.5144 had been weighing on the December Euro all week, but it took today’s better than expected employment report to finally push it over the side. This report may bring the Fed closer to hiking interest rates than the European Central Bank. This would close the interest rate gap between the U.S. and the Euro Zone which would be friendly toward the Dollar. The trend hasn’t changed to down but the Euro is now trading lower for the week.

The December British Pound reversed its earlier strength and is now trading lower. The short-term range is 1.6271 to 1.6720. This creates a retracement zone at 1.6495 to 1.6442. Today’s low was 1.6493. Traders are selling the British Pound because they believe the U.S. economy will recover faster than the U.K. economy.

A reversal in the carry-trade is helping to support the rally in the Dollar against the Japanese Yen. Earlier in the week the top was made in this currency when the Bank of Japan announced another stimulus plan but today’s better than expected U.S. economic news is the catalyst behind the strong break to the downside. The possibility of the Fed hiking interest rates ahead of expectations is triggering a reversal in the carry trade as investors are buying Dollars to pay back loans and initiating new positions with borrowed Yen.

The stronger than expected Canadian Employment Report offset the better than expected U.S. Non-Farms Payroll Report causing the December Canadian Dollar to trade range bound. At the mid-session, the Canadian Dollar is a little stronger but the market is stuck in a range.

The stronger Dollar is pressuring February Gold. This market is now trading lower for the week and in a position to post a very bearish closing price reversal top. This could lead to the start of a 2 to 3 week break of at least 50% of the recent rally. This means a possible break to $1127.00. Short-term support is at $1164 to $1150.

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