USD- may have a bullish breakout

Last week, USD broke above its 1 year old downtrend line at 75.50. The next strong resistance for USD is at 80-82. This breakout could lead to a rally in USD for the months ahead. The implication of a strong rally in USD is the potential unwinding of carry trades, where investors invest in risk assets globally with USD funding. In the late 1990's, we saw bouts of yen carry trades unwinding which led to sharp sell-off in risk assets. Are we about to see the same?


Chart 1: USD index's daily chart as at July 12, 2011 (Source: Stockcharts)



Chart 2: USD index's daily chart as at July 12, 2011 (Source: Stockcharts)

The unwinding of USD carry trades would not have a severe impact on US stock markets, as the underlying assets are in USD. However, we can see that large stock markets, such as Bovespa (Brazil), BSE (India), Hong Kong Hang Seng Index & Singapore Straits Times Index, have all corrected back over the past few months.


Chart 3: DJIA & Nasdaq's daily chart as at July 12, 2011 (Source: Stockcharts)



Chart 4: BSE & BVSP's daily chart as at July 12, 2011 (Source: Stockcharts)



Chart 5: HSI & STI's daily chart as at July 12, 2011 (Source: Stockcharts)

How would this impact Malaysia? Our local bourse has small foreign funds participation and would weather any sell-off better than the bigger regional markets, such as STI & HSI. However, it would be unrealistic to assume that we would escape unscathed. Nevertheless, we can expect our exporters to benefit from a strong rally in USD.