Carry trades sold off across the board today with the biggest losses seen in AUD/JPY and NZD/JPY. The only Yen cross to remain immune to the liquidation was CAD/JPY which held steady thanks to stronger Canadian economic data. According the VIX, which is the equity market?s measure of volatility, risk aversion is nearing the levels that we saw back in February, when we had the 8.8 percent slide in the Shanghai stock market followed by the 3 percent sell-off in the Dow.
The return of risk aversion makes the latest move more like liquidation than mere profit taking. It will be interesting to see if Mrs. Watanabe, who has stepped in to buy the yen crosses on any major dip will come back again to save the carry trades this time around. If we have significant follow through in the Asian stock markets tonight, traders will need to be careful of further USD/JPY weakness. The June corporate service price index and trade balance are due for release. These numbers will give us clues on how Thursday?s consumer price index will fare.