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Euro and US Dollar Headed Lower as Yen Carry Trade Continues to Unwind

Currencies / Yen Carry Trade Aug 08, 2008 - 03:09 AM GMT

By: Richard_Gorton

Currencies Best Financial Markets Analysis ArticleAn Elliott Wave 3 Down Commences In The EUR/JPY
The EUR/JPY fell lower today on increasing risk aversion to Lehman Brothers, Merrill Lynch, AIG, Fannie Mae, And Freddie Mac. It also fell lower with a massive sell off of the Chinese stocks.

Today's fall in the EUR/JPY has set in motion an Elliot Wave 3 Down in this currency pair, which will now cause disinvestment from stocks globally, not just from the BRICs, like it has been doing.


The rise in the US dollar has come as the result of the Euro selling off, on the ECB announcement to keep the central bank rate at 4.25%; that having been accomplished, and given that the dollar has retraced to its late February level, the dollar will now likely fall lower.

The USD/JPY has retraced to its January level in an ascending wedge pattern, so it too, will now likely fall lower; this will boost the yen which will be destructive to wealth globally, giving extra forceful punch to the Elliott Wave 3 Down in the EUR/JPY.

Trading details
On opening, the yen carry traders sold Lehman Brothers, LEH, Merrill Lynch, MER, and AIG Insurance. And on opening, they also sold the Chinese shares, FXI.

The EUR/JPY, FXE:FXY, the barometer of the yen carry trade, unwound, falling from yesterday's 1.699 to 1.684. ( EUR/JPY )

Currency traders bought the Yen, FXY, and sold the Euro, FXE, the Australian Dollar, FXA, the Canadian Dollar, FXC, the British Pound, FXB, and the Swiss Krona, FXS.

And currency traders are aggressively buying the US Dollar, $USD; this is forcing gold, $GOLD, as shown by Kitco.com lower to $870.

Gold, GLD, is down 1%.

Oil, USO, is up 1%.

The five day ongoing Yahoo Finance chart of the USD/JPY , shows a likely topping out as the USD/JPY is trading down from 109.47 yesterday to 109.43 today. ( Five Day USD/JPY ). The three month chart shows an ascending wedge; prices eventually fall from such in a sharp way. ( 3 Month USD/JPY )

The five day ongoing Yahoo Finance chart of the USD/EUR , shows a strong rising to 0.652 ( USD/EUR )

The five day ongoing INO chart of the US Dollar Index, DX , shows a strong rising to 74.52.

Freddie Mac, FRE, and Fannie Mae, FNM, fell lower for the second day in a row, documenting that the Freddie and Fannie Rescue and Financial Sector Rally is now over.

The five day ongoing Yahoo Finance chart of the financial sector, IYF , shows a gap open lower that is not being filled, relating that the Freddie, Fannie and Financial rally is all over. ( 5 Day IYF )

It's important to realize that the rally came from yen carry traders who sold their oil shares to take profits; they are now going to do the same and take profits on the financial stocks that they ran up.

Of all the indices, the Nasdaq, QQQQ, is the least set back by the unwinding, helped to stay up by semiconductors, while the Dow Industrials, DIA, are the most set back.

Sectors trading significantly lower include:
China, -5.7% off sharply on news that China is increasing its efforts to keep hot money out.
IAK, insurance, off sharply on AIG's reporting of a massive loss of $5.4B, -5.1%
PSP, private equity, these are the LBOs, the companies with great debt, -5.3%
KBE, banks, off sharply on Citigroup's $7B settlement with Cuomo of auction rate securities suit, -4.5%
KCE, investment bankers, off sharply on the sell of Lehman and Merrill Lynch, -3.9%
IFY, financial -4.1%
REM, reit mortgages -4.5%
TUR, turkey -4.1
IAI, stock brokers -3.4
XBI, biotechnology -3.4
XLI, industrial -3.1%
INP, India -3.1
HHK, health shares cancer -3.1
BJK, gaming -3
EEB , BRICS, off sharply as yen carry traders out of China to take profits -3%

I've covered LTC Properties, LTC , quite a bit in my blog as an example of a stock investment that is going to be ground zero for the Liquidation Thesis ; and I've commented that there has been a lot of yen carry trade dollars invested there. Well today, the carry traders took profit: it fell 3.5% today, after having fallen a lot yesterday. Recent candlesticks said it was going to fall soon. The chart of LTC communicates the exhaustion of a south sea bubble at the end of the age of fiat wealth.

The ongoing 5 day Yahoo Finance chart of the Russell 2000, IWM , shows the run-up to 71.9 which is .618 retracement from its recent low. Having obtained its objective, the Russell 2000 is now falling; note how the shares utterly collapsed in afternoon trading; the chart says "its all over now".

Kevin's chart of the Dow Industrials, $INDU , and associated comments in article Resistance Continues To Hold In The Dow are most helpful; the DOW chart shows the beginning of the TAF facilities on March 18; the expiration of the TAF Rally on May 19; and then the beginning of the Freddie, Fannie and Financial Rescue on July 14; and today the beginning of failure of that Rally. The blue line shows that which was once support is now resistance. In light of the failure of the financial sector, this chart provides clear, cogent and convincing evidence, to go short the DOW with DXD, or better yet to go short the US dollar with gold.

I've written extensively in the HUI section of my blog about how the gold mining stocks have been detaching from the price of gold. Charts from Jack Chan's JC's Buy And Sell Signals show that the gold mining shares, GDX , have completely broken down and fallen below their 200 day EMA, while gold, GLD has not. He gave his sell signal to the China shares, FXI , today.

The yen carry trade started to unwind on July 22, 2008
The monthly ongoing MSN Money chart of the Yen and the Euro relative to the BRICs, EEB , shows that an unwinding of the yen carry trade on July 22nd has caused an ongoing disinvestment from the BRICS. ( Disinvestment from the BRICS ).

And the monthly ongoing MSN Money chart of the currencies , excluding the dollar, shows that the unwinding of the yen carry trade, that is EUR/JPY, caused a massive sell off of currencies on July 22, 2008. ( Unwinding of the Yen Carry trade occurred on7-22-2008 )

Peak Currencies occurred on 7-22-2008. The currencies of the world died with the unwinding of the Yen Carry Trade. Going long the currencies with 0.5% interest rate loans from the Bank of Japan is clearly history.

Risk aversion to investing long is rising due to following factors:
1) the level two assets and level three assets at banks as well as the assets kept off balance sheet is SIVs and SPEs, as well as the poor financial report of the GSEs; this is resulting in disinvestment from US stocks; definitely the load of debt is causing an unwinding of the yen carry trade.
2) rising inflation and decreased profit potential in the emerging markets.
3) the blockage of investment from Chinese officials, as well as taking of profits by yen carry traders, is causing a sell off in the Chinese shares.
4) stagflation, that is rising inflation and deteriorating economics in Europe, is causing a sell off of shares there.

Today is a watershed day -- an Elliott Wave 3 down commenced in the EUR/JPY
The monthly ongoing MSN Money chart of FXE, FXY, VTI, VEU, and EEB shows that now with today's failure of the Freddie, Fannie, and Financial Rally together with today's unwinding of the yen carry trade, that liquidity efforts of the Fed and the Bank of Japan have failed, and that stocks are going lower. ( VTI, VEU, and EEB have failed as the carry trade unwinds )

The weekly chart of EUR/JPY, weekly FXE:FXY, shows the liquidity window of the Bank of Japan closing. weekly FXE:FXY

The EUR/JPY showed an Elliott Wave One Down On August 5, 2008 To 1.680 .

Then on August 6, 2008, the EUR/JPY rose to an Elliott Wave Two Up to 1.6999.

Now, today August 7, 2008, the EUR/JPY falling to 1.684, commences an Elliot Wave 3 Down in the unwinding of the Yen Carry Trade.

The Elliott Wave 3s are the most sweeping and dramatic of all waves: they create wealth on the way up and destroy wealth on the way down. The world's currency, bond and stock wealth will now be massively destroyed; and political, cultural and interpersonal chaos will grow exponentially.

We await Peak Dollar and then gold will arise as the global currency and means of preserving wealth
Given that we have passed through:
... Peak Currencies on July 22, 2008 with the yen carry trade unwinding,
... Peak Debt on March 18, 2008 as can be seen in the bond market place calling the interest rate on the 30 year US Treasury Bond, $TYX , higher in response to the Fed started to provide TAF, TSLF and PDCF facilities, and again on July 16, 2008 when the Fed announced its intentions to bail out the GSEs,
... Peak Stocks with the world stock markets, VEU, and US Stock markets, VTI, turning lower today. ( VEU and VTI )

We now await Peak Dollar:

... Soon the US Dollar will join the currently weak currencies in a death spiral -- where all currencies spiral lower into the chasm together, and gold will arise as the global currency and the means of preserving wealth.

One of the major reasons why the dollar soared is as ActionForex relates Euro Gets No Support from Trichet as the ECB left its central bank rate unchanged at 4.25, despite what I believe to be soaring inflation in Europe. Action Forex relates: "It's believed that EUR/USD's weakness as the press conference goes is due to the mentioning of "substantial decline in annual M1 growth" which is seen as an important obstacle to further rate hike from ECB".

Well, if you have read my blog, you know I am of the minority opinion that M1, MZM, M2, and M3 are not measures of inflation, but rather measures of liquidity.

Trichet collapsed in resolve and action; he should have called interest rates higher, and not given indication, as he did today, to the possibility of a central bank cut.

The central bank officials of the world are a cabal, and are going in the direction of lower interest rates, supposedly to stimulate growth, but the reality is to liquefy insolvent banks.

The closer we get to zero, the closer we get to a one world government and a 'global financial system' operating under a ' unified regulatory framework ', as envisioned by Timothy Geithner, President of the New York Branch of the Federal Reserve. There is no stopping Geithner's Cat In The Hat plan; it will one day be the reality.

I envision the world wide bond market place continually calling interest rates higher across the board, as concern grows about the debt of all types; really it's all 'irredeemable debt'.

Whenever central government interest rates are below market place interest rates, the price of gold rises, one could say inflates; and an investment demand for gold is created as can be seen in the chart of gold relative to stocks, GLD:VTI, which rose today.

It has been rising strongly since May 1, 2008 when institutional investors sold the financial stocks, IYF, and went long CRB commodity futures and indexed ETFs and mutual funds, such as RJI, DBA, USO and GLD. And the investment demand for gold further soared in mid June 2008, as the yen carry traders sold out of traditional yen carry favored stock investments in the BRICS . ( GLD:VTI )

One could argue that strength for gold may not come until EUR/USD falls from its current 1.5398to 1.5224, which is a level forecasted by Pak Lai Ng, a technical analyst at Forecast Pte in Singapore ( Stanley White of Bloomberg ).

But, I think the dollar is going to fall quite soon, like tomorrow August 8, 2008 as:

1) The chart shows a parabolic rise in the US Dollar to strong level of resistance. $USD ; thus the dollar will be falling lower now.

2) The Elliott Wave 3 Down in EUR/JPY will pick up steam -- it's in outbreak, and will now cause disinvestment from stocks globally, not just from the BRICs, like it has been doing.

3) I've found it strange to watch the dollar climb against the euro and other currencies, even after a series of bad economic reports, such as the one of claims for unemployment benefits rising to its highest level in six years, can the dollar continue to do so? Well no, of course not. One day soon, the accumulation of bad news will take its toll. Or better said, a report will be cited as a reason why dollar is falling, when in fact there are underlying currency differentials and interest rate differentials at play but are never mentioned in the general media.

4) If the dollar is to appreciate further, it will do so on the concept that the financial sector of the US is in better shape than the rest of the world's banks and investment bankers. That concept was tried today and found failing, as the financial sector, IYF, sold off.

Alf Field, writing in 321Gold.com article Elliott Wave Gold Update XXI , like myself, relates the potential of gold falling to $850 or $830 before moving higher. Yes these levels are strong support as the Privateer shows a 2x3 support level for gold at $850 .

The chart of gold shows a close today at $873. ( Gold, $GOLD )

Investment application
I recommend that one have a diversified wealth preservation investment strategy; it's much like having a three legged stool, with the real thing in the vault and the derivatives in a trust account.
1) gold at BullionVault.com and
2) gold at GoldMoney.com and
3) Derivative ETFs DGP, SKF, and TBT, in a trust account and not a brokerage account.

TBT fell today; I would wait till it falls some more before I buy.

SKF is in breakout; it's a buy at today's 123.

DGP is going to rocket higher as gold soars higher.

The wealthy should take note of the scientific investment research: The author in Calendar Yen Trading Patterns provides historical record that EUR/JPY and USD/JPY is frequently down in the month of August.

We are at the very cusp of the EUR/JPY falling massively lower, so it rates sell, sell, and sell.

Today's action in the USD/JPY definitely is contrary to the seasonal norm; but, I expect the dollar to weaken even against the yen starting tomorrow, as the USD/JPY has risen to its highest level since January 08. In other words, having made full retracement, this is a sell as well.

Major ETF symbols used in this report

FXI, GLD, EEB, FXY, FXE, $TYX, IYF, $USD, DGP, TBT, SKF

By Richard Gorton

Richard Gorton
409 York St #908
Bellingham, WA 98225

http://my.opera.com/richardinbellingham/blog/

Im an investor; and my investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

© 2008 Copyright Richard Gorton - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Richard Gorton Archive

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