Carry trades have continued to rise, but the moves today reflect cautious buying ahead of the Bank of Japan?s interest rate decision.
Although the market does not expect the central bank to raise interest rates, there is a minor risk that they could. The Japanese Yen has sold off significantly over the past few months putting the government under pressure to put a halt to the currency?s slide. Now that the Yen has also hit a five year low against the US dollar, the criticism of the currency?s weakness could heat up. Prior to that, the Europeans were the primary ones complaining about the weak yen?s impact on global trade but the market barely reacted because their bark tends to be bigger than their bite. If the US starts getting uncomfortable as well, it becomes a totally different story. Therefore if USD/JPY continues to rise, the chance of a Bank of Japan interest rate hike will increase as well. In the meantime, continue to keep an eye on the US equity markets. Carry trades will die when the Dow dies. Aside from the BoJ interest rate decision, we also have the tertiary industry index and the BoJ monthly report due for release.