Are Speculators Still Buying Carry Trades?

Nearly all of the Japanese yen crosses hit new 10 day lows on the back of continued carry trade liquidation. With no major Japanese economic data on the calendar, this breakdown is mostly due to today?s triple digit losses in the Dow.

However interestingly enough, retail investors continued to increase their long USD/JPY exposure according to the latest FXCM Speculative Sentiment Index. Banks on the street are reporting the same increased exposure by FX margin accounts. This indicates that despite the sharp breakdowns seen over the past few weeks, retail investors are not ready to give up on the trade that has made them money for the past few years. From a price standpoint, this means that if the sell-offs continue, the moves lower could be fast and sharp as those who have gone long at current levels or higher get stopped out. Meanwhile the VIX index of equity market volatility is up again, indicating that risk aversion remains highs.