Yen/Dollar Swings: All About the Carry Trade?

June 29, 2007
By Ken Worsley

Are the headlines making your head spin yet? Back on Tuesday (June 26), Finance Minister Koji Omi told reporters, “Foreign exchange markets should reflect Japan’s economic fundamentals…We will keep a watchful eye on foreign exchange rates…The weak yen symbolizes the shrinking presence of the Japanese economy. It is obviously bad news.”

It caught my eye, but I knew it wasn’t policy. Nonetheless, we saw these headlines start to pop up on June 27:

Yen Rises Most in 10 Weeks as Investors Scale Back Carry Trades (Bloomberg)
Yen Rises for a Third Day as Investors May Unwind Carry Trades (Bloomberg)
Yen climbs on risk aversion, carry trade unwinds (Reuters)
A Meltdown From The Yen-Carry Trade? (Forbes)
FOREX-Yen rises on risk aversion, carry trade worries (Reuters)

Then, a day later:

Yen Weakens on Speculation Investors Are Restoring Carry Trades (Bloomberg)
FOREX-Yen’s rise fizzles as risk-aversion eases (Reuters)
BOJ’s Inoue Sees `Huge Amount’ of Capital Flows Leaving Japan (Bloomberg)

The writers must be having a ball. Once they have software to write these articles automatically, the news firms will save a quite a bit of money.

Meanwhile, the human beings will continue to do analysis. On June 26, writing at Seeking Alpha, Jordan Kahn (author of the excellent In the Money blog) published a piece entitled “The Yen Carry Trade is Alive and Kicking.”

As Mr Kahn put it:

The Yen has actually slid to a 4 1/2-year low versus the dollar. This indicates that the Yen Carry trade is alive and well…At some point, the Yen is likely to rally, and concerns about the unwinding of this massive trade will resurface.

It’s a short piece, but to the point: The trend is still there and still very alive, despite the major media’s panic over a swing down to 122.20 and up to 123.35 over two days (and we have to wonder if they’re forgetting about those low 121s earlier in the month - better chance to sell yen on ‘discount’).

The carry trade still has legs.

Filed Under Carry Trade, Exchange Rates, Forex