Charts turn in favour of US dollar and against the carry trade
NO, it is not the Asian crisis of 1998 all over again. But, yes, it must have become a lot more hairy in financial markets if the world's largest central banks have found it necessary to pump in more than US$300 billion worth of short-term liquidity. Fund managers at French banking giant BNP Paribas defined the painful return to risk aversion in financial markets last Thursday, by suspending payments on something like 1.6 billion euros' (S$3.3 billion) worth of managed funds - following in the footsteps of US investment bank Bear Stearns a week earlier.
And although the worst seemed to have blown over by this Monday, the mere mention yesterday afternoon that Spain's Banco Santander might also have something like 2.2 billion euros in credit exposure to US borrowers was enough to upset the euro all over again.
Before European traders had time to warm their comfortably padded seats yesterday afternoon, erstwhile 2007 favourites like the Australian dollar, New Zealand dollar and euro had already recorded US dollar lows not seen in seven, 11 and five weeks respectively.
And by the time Asian players had finished for the day, it was the New Zealand dollar which had again recorded the worst losses of the past week - sliding between 4 and 5 per cent each versus both the US dollar and Japanese yen - just as its high (and rising) yields had earlier this year made it one of the most popular destinations for yield-seekers.
Along the way, the drive to reduce risk also hurt more exotic Asian currencies as speculative players closed out positions and sent their money home - with the central banks of Indonesia, Malaysia, the Philippines and Taiwan reportedly coming in to sell the US dollars against their home currencies to slow their losses.
Such hurried repatriations benefited the US dollar and Japanese yen most, since both countries happen to also have the largest pools of funds under management - possibly up to US$25 trillion, by one estimate.
Indeed, the danger that things can get worse before they get better has risen substantially now. To make things potentially worse on the funds flow side, researchers at Swiss bank UBS warn that it's a particularly heavy week for bond maturities and coupon payments on both sides of the Atlantic - which threatens to put even more upward pressure on the yen.
And on the tech front, the picture has soured in awfully swift fashion for US dollar bears as well as carry trade fans, forcing us to look for potentially deeper correction targets in the upcoming fortnight. Key US dollar resistances we have been watching have been all too easily busted on the upside over the past week, while yen supports have been all too easily trashed on the carry trade side.
Let's take a closer look at the US dollar first. Round-number supports for the Australian and New Zealand dollars were understandably brittle at 85 and 75 US cents respectively - given the heavy carry trade unwind. But by yesterday evening, the US$2 support for the pound had also given way, and the US$1.35 support for the euro was less than one US cent away.
On a broader indexed basis, the greenback has already elbowed its way above not only one but two of our overhead resistance areas - easily surpassing the 80.60-80 region and testing the more important 81.25 area by yesterday evening. A successful spike above the latter now opens up an 82.00-20 objective. At home, this will likely translate into a test of the S$1.5280 to S$1.53 topside area at least.
In terms of key yen cross trades, the first important support areas highlighted here last week for favourite beneficiaries like the Australian dollar, New Zealand dollar and British pound - at 100 yen, 99 yen and 237.5 yen - have all been blasted out of the water very easily too.
New respective round-number targets loom on the downside at levels such as 95 yen, 85 yen and 235 yen, if financial market jitters are going to get worse before they get better. All the more so if the key 160-yen support for the euro proves brittle as well.
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