Yen Crosses Could Stabilize But Short Term Risk Remains on Downside

Euro and Sterling stabilize a bit against dollar today as the greenback is dragged further down by selling in USD/JPY. Though, the high yielding commodities are still the biggest victims of the current carry trade unwinding. Fed fund rate surged to as high as 6%, well above Fed's target rate of 5.25% earlier today and triggered the Fed to add another $19 b in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash. On the other hand, ECB also loaned another 61.05b euros into the banking system. Sentiments in the markets remains fragile as US stocks are set to open lower, following yesterday's sharp sell off and today's fall in Asian and European markets.

However, note the deeply oversold yen crosses are showing signs of stabilizing in intraday terms as US session approaches. We could see some sideway trading and recovery in yen crosses in the US sessions, provided that the stock markets also stabilize after initial fall. But still, the short term outlook in yen remains bullish, and any recovery in the yen crosses will be treated as 'recovery' only, and more downside is still expected to come next week.

On the data front, canadian unemployment rate dropped to new 33 year low of 6.0% in Jul. The U.S. Import Price Index increased 1.5% in July, following a revised 0.9% rise in June and was led by an increase in petroleum prices. Export prices rose 0.2% in July, after increasing by 0.3% in the previous month. To be released later today, Fed budget report is expected to show that the budget deficit narrowed slightly to -32.5b in Jul.