Although an agreement with the Federal Reserve and the Treasury cannot bring back the good old days of the carry trade, the recent announcement of a federal backing of Citi assets may very well spark some intermediate bullish reprieve in the currency markets. Currencies like the British Pound, Australian dollar and New Zealand dollars have been pounded in recent weeks as position deleveraging continued to be the popular strategy with sterling falling as much as 27 percent in just under three months. However, with a shortened holiday week, thinner volume and higher hopes, a breather seems ready to set in for a bit.

Bailout Details

Recapping what newsrooms and trader chats have been buzzing about, the recent decision involves more than just lending a cash infusion to what used to be one of the world’s largest banks. Initially, Citigroup will be receiving a $20 billion cash injection, already on top of what was doled out under the TARP plan ($25 billion). The catch here comes with the fact that the US government will now fully back and guarantee $306 billion in order to support toxic assets that are still on Citi’s balance sheet. In return, Citi offered $27 billion of preferred shares paying a dividend of 8 percent in addition to warrants to purchase shares at a little less than $11 a piece. The latter would give the opportunity for the taxpayer funds to reap a return should the share price rise back to previous levels.

Why This Plan?

With the stock price plummeting 83 percent since the beginning of the year, there were fears that another Lehman failure may be in the works. Although the banking institution did retain a good deal of toxic assets, a definitive part of the failure stemmed from the inability of the market to retain its composure as shorter sellers decimated the stock price. Should Citigroup fail, the unfortunate would cause ripple effects equal to the enormity of the firm. Citigroup for the record has nothing short of $2 trillion assets under its belt with operations in 100 countries.

What To Look For

Given the recent plan to support falling financial markets, opportunities look to be abound in both Australian and New Zealand dollars. In particular, carry trade currency pairs against the Japanese yen may find a lift in the recent days as traders leave for the US holiday and markets are subjected to even thinner volume compared to last week. The latter would help to exacerbate any profit taking on the recent bearish slide in currency markets. In particular, AUDJPY buyers are looking for a surge higher as the currency pair breaks through 60-minute channel resistance at 61.56. Initial targets remain just below the 63.76 resistance (50% fib from 69.60-56.84 bearish push).

Tags: Australian Dollar, Carry Trade, Citigroup

This entry was posted on Monday, November 24th, 2008 at 11:49 am and is filed under Australian Dollar, Currency Trading, Investments and Trades, Japanese Yen. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.