Tuesday, September 11, 2007
Rally by Carry Trade
by David Yu
Congratulations to the San Francisco 49ers on Monday's night's come-from-behind victory in the final minute of the game. Ugly or not, a win is a win. After all, wins and losses are the most important statistics. It's no different in trading. After studying all the market statistics, the goal is to achieve this ultimate statistics of accumulating more wins than losses, which in turn means more money in our bank accounts. Fortunately, trading has no fixed schedule. Therefore, sometimes, in order to preserve our winning, we may have to sit out a few games when the market condition becomes too risky to play. And, this may be the right time to watch the game from the sideline.
I'm not too crazy about trading this perfidious market. And, from my conversation with other traders and from the recent low trading volume, I'd say I'm not the only one. You feel uneasy to go long because updays have been accompanied by low volume. And, you feel just as uneasy to go short because you don't want to fight the Fed. So, other than a small trade here and there, I've been mostly staying on the sideline.
From my sideline view of the game, it seems that the most important player in the game right now is the Dollar. Since I brought to your attention the breach of its intraday low of 79.958 on Friday, today the Dollar Index has dropped to yet another intraday low of 79.603. All this is, of course, great news for us gold investors. The price of gold had appreciated almost 11% in less than a month. Last May's high of $730 is looking more obtainable every passing day. But gold is never my concern anyway. I just buy them and put them away. My concern is primarily the peculiarity of the Dollar's strength against the one and only (debatably) major currency, the Japanese Yen.
While the Dollar has been losing ground against most major currencies, its recent rise against the Japanese yen is the force behind the market's rebound this week. The intraday charts of the Yen (Chart 1) and the S&P 500 Index (Chart 2) have been moving almost tick for tick at times. At the time of my writing today, about 1:50 pm (EDT), each dollar could be exchanged for 114.14 Japanese yen (Chart 1), up from yesterday's close of 113.56.
Chart 1
Chart 2
Investors have obviously been betting on the rebound of the Yen-Dollar carry trade. While it's technically and fundamentally probable that the Japanese yen may continue to decline, it remains to be quite a risky proposition. Anything could happen before and after the BOJ and the FOMC meeting next week.
O.K. so much to talk about, so little time... I'd better get back to work before the closing bell.
Have a wonderful day!
email: dyuguard-2@yahoo.com