By DailyFX - US Dollar - The financial markets have taken a blood bath today with the Dow plunging over 400 points and the dollar...

... hitting a 1 year low against the Japanese Yen.

Risk appetite is plunging as investors bail out of nearly all assets. The
moves have been very substantial and February 27, 2007 will either go down as a
major historical turning point for the financial markets or an unparalleled buying
opportunity. To read more about whether this is a major pivot point into a
recession, read our Special Report on DailyFX.com. Having been the primarily
funding vehicle for a lot of these leveraged bets, the Japanese Yen was a great
leading indicator for todays move. The 9 percent drop in the Chinese stock
market is being quoted as the initial trigger for the drop, but the broadness of the
liquidation suggests that we have just seen a major shift in investor risk appetite.
The moves today represent concerns about US growth. Durable goods orders dropped
7.8 percent in the month of January, which is the largest decline in 3 years.
Excluding the volatile transportation component, orders fell by 3.1 percent. As we
mentioned in yesterdays Daily Fundamentals, the markets reaction tends to be
very volatile because of the underlying information provided by the ex
transportation component. However by the end of the day, the headline number left a
longer lasting reaction in the EUR/US and this was exactly what we saw today.
Even though consumer confidence hit a 5 year high and existing home sales increased
by the largest amount in 2 years, the drop in durable goods orders was what
mattered. As a component of GDP and a forward looking indicator for consumer
consumption, the weak demand for big ticket items could trigger some concerns about
the sustainability of the US recovery. The combination of low inflation, softer
growth and problems in the sub-prime lending market will make it difficult for the
Federal Reserve to raise interest rates again this year. Both the Financial Times
and the Wall Street Journal have extensive coverage about the problems in the sub
prime mortgage market today. According to the WSJ, banks are holding the lowest
level of reserves to cover bad loans since 1990. With approximately $600 billion
more adjustable rate mortgages to be reset to a higher market rate this year, two
thirds of which are sub-prime, the risks for delinquencies and foreclosures are
substantial. The markets risk aversion is so high right not that even if
tomorrows GDP, Chicago PMI or new home sales figures surprise to the upside, it
may only have limited impact on the dollar.

Euro - The limited decline in the US dollar against the Euro confirms our belief
that the major move in the markets today is primarily a liquidation of leveraged
bets. Hawkish commentary by the central bank and stronger money supply figures
continued to fuel gains in the currency pair. Remaining at a 17-year high, M3 rose
by 9.8 percent year over year. The market was only looking for a mild rise of 9.5
percent. German CPI still accelerated in the month of February even though the rise
was slightly softer than expected. This indicates that the Value Added Tax increase
is finally revealing its impact on consumer prices, albeit a mild one. Separately,
German retail manufacturing activity jumped slightly in the month of January,
printing a 45 compared to last months 43.9. The Eurozone figures rose to 49.8
from 47.9. Despite the improvement, the contribution to the Euro was limited
because the index still remained in contractionary territory. Looking ahead,
Eurozone unemployment, German unemployment, Eurozone consumer confidence and
consumer prices are all due for release. German retail sales were delayed to March
2nd. Improvements are expected in all of the reports, which should continue to give
the European Central Bank reason to lift interest rates. Switzerland reported a
stronger UBS consumption indicator. This suggests that we could also see stability
in the KoF leading indicators report tomorrow.

British Pound - Interestingly enough, the GBP/USD, which is normally a very
volatile currency pair had the tightest trading range today. There was no major data
release which means that we will have to look ahead to tomorrows data, including
both the consumer confidence survey and the Nationwide Housing price report for more
direction. Expected to rise by 0.5 percent, housing prices are estimated to have
bottomed slightly, lending to positive undertones in the UK economy. However, there
is plenty of room for lower than expected actuals as mortgage applications data was
less than exemplary in the London morning. Separately, consumer confidence is
estimated to remain relatively close to last months results with median estimates
anticipating a -8 reading. Lower figures are possible following the dour spending
figures seen in the beginning of the month.

Japanese Yen - Movements in the Japanese Yen was the main focus today as the
currency skyrocketed against everything in sight. Carry trade liquidation is in
full force and usually when this happens, it is not just a one day affair. After
having already made great profits being long the Dow and the short the Japanese Yen,
leveraged traders may not be as easily willing to get back into the market at this
point, especially given the risks that the US economy faces. In fact, the
liquidation could exacerbate as more traders bail out of risky assets. Major players
are getting stopped out of their long trades and we expect more to come. The Dow
dropped 200 points intraday in a matter of minutes while USD/JPY dropped 100 pips in
a blink of an eye. The quick and sharp reversal in the Dow and the far milder
reversal in the dollar is clear indication that some big money was being stopped
out.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies collapsed today on
the back of carry trade liquidation in the high yielding currency pairs. Australian
data was stronger than expected with new home sales rising for the second straight
month. We heard encouraging words from the typically grim Costello who said that
small businesses were more confident. New Zealand on the other hand reported softer
inflationary numbers. The RBNZ followed up the report with a downward revision to
inflation expectations. We could continue to see more liquidation out of the high
yielders as we close in on the Japanese fiscal year end on March 31st.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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