Carry Trades: Expect More Losses

None of the Japanese Yen crosses have been spared from today?s massive and widespread exodus out of carry trades. With the exception of CHFJPY, every other yen cross lost a minimum of 200 pips.

Risk aversion is back and we expect it to be here to stay. Unless the Fed steps in with an intermeeting rate cut, the Dow will want to test the 13,000 level by the end of next week. As currencies and equities continue to move together, this should have a negative impact on the Yen crosses as well. When Asian traders return to the markets on Sunday night, we expect them to react the same way as US and European traders. Further losses in the Dow will also make it a difficult night for carry trades. Risk or no risk is still the big driver of the markets and based upon today?s movements, it seems that no one wants to take on any risk. Japan will be releasing second quarter GDP along with industrial production CGPI, current account and consumer confidence next week. These reports will probably matter little to the overall market as they focus on figuring out how much worse the US economy can get.

Written by Kathy Lien, Chief Currency Strategist of