The sell-off in carry trades yesterday cause a wave of concern that the major liquidation of risky assets has finally begun. Today?s rebound in the yen crosses however is a testament to the resilience of carry trades and the market?s unwavering demand for yield. Currencies pairs like GBP/JPY and CHF/JPY have not only rallied, but they have also recovered 100 percent of their prior losses.
This indicates that the market is expecting nothing from the Bank of Japan who will be announcing its monetary policy decision this evening. The BoJ is widely expected to leave interest rates unchanged at 0.50 percent. Japanese economic does not support an immediate rate hike. CGPI, which is an inflation measure dropped in June. The only risk would be if the central bank decides to significantly upgrade their degree of hawkishness, which could be possible. The recent drop in the Japanese Yen has caused frustration around the globe. Hawkish comments could take some steam out of carry trades. Many analysts are looking for the BoJ to raise rates in September. Strengthening their tone at this time could also prepare the market for the inevitable.