US Dollar
The problems in the sub-prime lending market have become too much for even the most optimistic trader to handle. New Century Financial Corp, the poster child of the meltdown in the sub-prime lending sector had its shares suspended from trading on the NYSE today and will most likely be de-listed in the near future. Although the market had become somewhat accustomed to hearing about the problems at New Century Financial, it was not prepared to hear that mortgage delinquencies hit a 4 year high in the fourth quarter. In the sub-prime market, delinquencies reached 13.33 percent and even though non-subprime borrowers are far less likely to be delinquent on their loans, the rate has been growing since the first quarter of 2006. With the housing market just beginning to turn, the worst may be yet to come. The Dow has fallen close to 245 points or 2 percent today, marking the biggest one day sell-off since the 3.3 percent move on February 27th. Risk aversion has returned to markets with traders liquidating all of their risky and high yielding positions. Carry trades have been hit the worst with NZD/JPY falling by 2.2 percent, AUD/JPY falling by 1.51 percent and USD/JPY falling by 1.12 percent. In addition to the problems in the sub-prime sector, consumer spending fell short of expectations for the month of February. Headline sales rose a meager 0.1 percent while sales excluding autos fell 0.1 percent. This is the first drop in sales excluding autos since Oct 2006 and suggests that first quarter GDP will be particularly weak since sales were flat in the month of January. Cold weather and a downturn in the housing market are to blame as sales of furniture and building materials slip significantly. Weaker consumer spending at a time when the sub-prime lending sector is in disarray could force the Federal Reserve to cut rates as early as this summer. With both stock market and housing market wealth of Americans slipping, future growth looks extremely bleak. At this point, the US dollar has few reasons to rally but any further extension lower may not come until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.

Euro
On a day when we have seen a massive liquidation of many currency pairs, the fact that the Euro has been able to remain unchanged is quite remarkable. The strength in the German ZEW survey is sure to have helped. Even though analyst sentiment deteriorated between February and March, the deterioration was far less than expected as concerns about the Value Added Tax increase and the recent interest rate hike remains limited. In today’s market, it is all about relative performance and right now the outlook for the US economy is far more concerning than the outlook for the Eurozone. In fact, Bundesbank President Weber joined ECB’s Liebscher in saying that the risks to price stability remain strong and because of that, the ECB will need to raise rates again. Compare that to the Federal Reserve who may need to cut interest rates before August and we have a very clear explanation of why the EUR/USD is still holding strong. Eurozone industrial production and French and Italian consumer prices are due for release tomorrow.
None of these reports will be particularly market moving. Traders will have their eyes pinned on USD/JPY and the US stock market to see if both will continue to sell-off.

British Pound
The British pound has sold off against everything in sight as the pair comes under the pressure of carry trade liquidation.
Having been one of the market’s favorite carry trade currencies to invest in over the past few years, it has also become one of the first to be sold in this wave of carry trade liquidation. UK data released this morning was mixed. The RICS house price balance reported the weakest growth in prices in 9 months. Although this is the first of many indexes to report softer price growth, traders should not completely ignore it. The key to figuring out whether the BoE will raise rates again this year is housing. It is important to keep on top of how the housing market is faring because it is a key component to their decision making. Looking ahead, we have unemployment data tomorrow. The report is expected to be positive for the British pound with the number of claimants dropping and average hourly earnings rising.

Japanese Yen
Once again, the Japanese Yen has stolen the show by ending the day with the biggest movements in the currency market. Over the past few weeks, if you want trade volatility, you have to be in the Yen. With no economic data released last night, the move today was completely driven by the liquidation. The Dow and USD/JPY relationship remains very much intact, but even though USD/JPY sold off first, the sharp reversal in the Dow appears to have exacerbated the sell-off in USD/JPY. We will probably see a bit more liquidation since prior waves of carry trade selling over the past few years have resulted in an average loss of 8 percent. So far, USD/JPY has fallen approximately 4.5 percent. We are only expecting the revision to industrial production tonight. There are no Japanese data of consequence until the Bank of Japan monetary policy meeting next week so flows will continue to drive the fluctuations in the Yen.

Commodity Currencies (CAD, AUD, NZD)
The Australian, New Zealand and Canadian dollars have all sold off significant today as traders liquidated all risky assets. Even though the market was very bearish US dollars today, they were even more bearish the Australian and New Zealand dollars since these pairs offer a higher interest rate than the US and because of that, they have been the preferred carry trade currencies for the market. The New Zealand dollar fell 1.45 percent against the US dollar while the Australian dollar fell 0.57 percent. The stronger Australian business confidence and job advertisement reports may have helped to limit the slide in the Aussie. Meanwhile the Canadian dollar dropped because traders were concerned that the down turn in the US housing market and the US economy as a whole could have a spillover effect on the Canadian economy. Looking ahead, we are expecting New Zealand manufacturing activity and Australian consumer confidence tonight. These reports will most likely do little to shift the current market sentiment.

Kathy Lien is the Chief Currency Strategist at FXCM.