The Dow is Falling, Why Isn’t USDJPY?

February 5, 2008

The Dow is down over 300 points, yet the US dollar has remained stationary against the Japanese Yen throughout the US trading session. Over the past few weeks, on DailyFX, I have talked about how the correlation between US equities and carry trades is breaking down because buying one no longer means buying the other. Risk aversion is still a problem and traders may simply be recycling money that is parked in local currencies.

However one other factor explains why USDJPY is frozen and it is simple, there are no more sellers!

According to the latest COT report, yen longs have reached an extreme. This means that everyone who wants to be short US dollars against the Japanese Yen are already short.

The following charts illustrate the big divergence in today’s price action in the Dow and USDJPY. Equities traders only wished that the Dow ended the day “flat” like USDJPY.

USDJPY 5 Minute Chart (source: eSignal)

DJIA 5 Minute Chart (source: eSignal)

Posted in Dow Futures Carry Trades, Dow, Japanese Yen, Carry Trades