What does the Dow Foreshadow for Carry Trades?

September 3, 2007

Over the past few weeks, carry trades have moved in lockstep with the Dow Jones Industrial Average. When US stocks are strong, carry trades rally and when they are weak, carry trades fall. The rationale for the relationship is clear, as both are a measure of the market’s risk appetite. On Friday however, the Dow rallied 119 points, but most of the carry trade currency pairs either sold off or remained flat for the day. The fact that carry trades did not rally when the Dow rallied suggests that the market’s appetite for risk is even weaker than we may have thought. As indicated by the chart below, the Dow is hitting very significant resistance. Not only did the index fail right below the 50 and 100-day SMA, but its gains are also capped by the 61.8 percent retracement of the 14021-12517 bear wave. Therefore, chances are strong for the Dow to give back those gains when the stock market reopens on Tuesday. If so, then carry trades could come under pressure once again.

Chart of Resistance in the Dow

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