Yesterday I mentioned that “risk trends remain the primary driver of the financial markets, which is likely to continue benefiting low yielding currencies like the yen and dollar, while high-yielding currencies like the Australian dollar and New Zealand dollar may be prone to the sharpest declines.”
This was indeed the case on Wednesday after US Treasury Secretary Henry Paulson said that the government would not purchase illiquid mortgage-related assets under the Troubled Assets Relief Program (TARP). Ironically enough, the first aim of the program listed by Assistant Secretary of the Treasury for Financial Stability Neel Kashkari on October 14 was to identify “which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives.” Instead, Mr. Paulson suggested that the government intended to use the funds to shore up the capital positions of financial institutions, mitigate mortgage foreclosures, and improve the availability of consumer credit. Overall, the news was disappointing to the markets, as evidenced by the sharp drop in US stocks and surge in the Japanese yen, and it seems like investors aren’t too confident that banks will be able to weather the persistent financial crisis without another party taking illiquid mortgage-related assets off their books. Given the inverse correlation between the Japanese yen and the DJIA, the low-yielding currency could surge even higher if the DJIA breaks below the recent lows and the psychologically important 8,000 level.
Related Article: Forex Markets Remain Highly Correlated to Crude Oil, Gold, Dow Jones Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.