SigmaForex Market News

The US government could be taking the phrase 'carpe diem' a bit too far as it took an unprecedented move in seizing Fannie Mae and Freddie Mac in an attempt to save the beleaguered housing market. Financial markets took the news as a positive, removing the uncertainty surrounding both companies' fate as well as that of the housing/credit market. US equity futures were generally over 2% higher and the Nikkei was up 368 by midday.
In the realm of currencies, the removal of uncertainty and increased optimism was manifested in a huge rally in the carry trade, the JPY and CHF crosses. The reason for the positive correlation between the JPY crosses, equity markets, and the general perception of risk could be because the carry trade is based on credit. Therefore, as the availability of credit increases, risk perception decreases, equity markets rally, and the carry trade benefits. Elsewhere, the USD action was mixed as we saw the USD higher against the JPY but lower against the EUR and GBP.

'Seize the day' is the typical translation for carpe diem but another interpretation is 'eat, drink and be merry, for tomorrow we die.' If markets believe that today's action could leave the US government overstretched and we could see another round of USD selling that creates another crisis one in which there may not be a backstop. Optimistically, one might believe another important phrase 'Don't fight the Fed.' In this case, it is the government and we wouldn't fight it either