Thursday, September 11, 2008
[M]any countries that were resisting pressure for upward appreciation are now selling dollars to defend their currencies.
another telltale chart -- the ratio of euro to yen. this is perhaps the most important carry trade metric in the world. when it goes up, traders are taking on risk. when it goes down, risk aversion is the rule.
in previous shakeouts in this downturn, it has been more or less a coincident indicator with the S&P. in this case, however, it began a rapid move lower in mid-august -- leading the index lower.
the rapid shift of european economies into recessionary territory is part of the issue. but japan too is throwing off powerful recessionary indications which should be weakening the yen. chances are that a serious contraction in the carry trade is a primary driver here -- one more pronounced and desperate than earlier incarnations.