Risk aversion resurged this forex trading week, supporting the Japanese yen but undercutting high-yielding currencies as investors unwound carry trades and fled to Treasuries. Losses from the subprime crisis currently stand at USD 511.3bn, 50% amongst U.S. banks and 46% in the Eurozone.

The RBA reduced the cash rate target by 25bps to 7.0%, the first cut since December 2001. GDP growth in 2Q2008 printed at 0.3% and 2.7% y/y, with significant declines in farming and household sectors and a 13.1% surge in the terms of trade for the quarter, particularly in mining, while the July trade balance recorded a deficit of AUD 717mn, more than double market expectations. AUD/USD continued its downward trend, punching through resistance at the 0.8250 level and closing at 0.8127, 17% below 15 July’s high of 0.9849.

The U.S. August unemployment rate rose to 6.1%, possibly skewed by changes to the benefits structure, while payrolls fell by 84,000 and job losses for the previous two months were revised sharply upward, the eighth consecutive month of job market declines and worse than market expectations. The most recent Beige Book was generally downbeat and indicated possibly slowing exports, the brightest spot to date in the U.S. economy.

The ECB maintained its main refinancing rate at 4.25%, as expected, with a neutral bias going forward although emphasizing potential secondary inflation effects, which are more likely in the Eurozone than the U.S., and economic growth projections for 2008 were lowered. The ECB also toughened its collateral rules, intended for risk management but effectively tightening liquidity while German industrial production fell −1.8% m/m in July. In response, EUR/USD dropped 3% in the week to 1.4234, a level not seen since October 2007 and meeting the projected target for the double top finalised mid-July.

The BoE left their official rate at 5.0%, as expected, attempting to contain inflation at 4.4% even though Chancellor Darling called the global slowdown the worst in sixty years. The pound’s slide continued against most major currencies, EUR/GBP falling to an historic low of 0.8188, while GBP/USD closed at 1.7639, a level not seen since May 2006.

The BoC made no change to the overnight rate of 3.0%, which was termed “appropriately accommodative” for a surprisingly resilient economy. Canada added 15,200 jobs in August while the unemployment rate remained at 6.1%. USD/CAD traded flat for the week, between support at 1.0573 and resistance at 1.0747, while AUD/CAD rolled off the proverbial table, losing 5% in the week and closing at 0.8638.

The RBNZ meets on 11 September and is widely expected to cut rates by another 25bps or possibly more. The forex trading market has already priced this in, with NZD/USD down 2.3% for the week, closing at 0.6670, and AUD/NZD continuing rangebound between 1.2150 and 1.2300.

With volatility high enough to wipe out carry trade profits, many were unwound, strengthening the Japanese yen versus all of the world’s major currencies. AUD/JPY fell as low as 85.01, below the nadir of August 2007 and the onset of the subprime crisis, while USD/JPY dropped through the bottom of last week’s price channel, rebounding strongly on Friday from support at 105.60 to close the week at 107.21. This is best seen on four-hour charts and shown below.