Carry Trades Hit Fresh Highs: The Party Hasn't Ended Yet

No matter which way you slice it, carry trades refuse to die. In fact, new highs were hit in nearly all of the Japanese Yen crosses today despite the collapse in the Dow. The voracious appetite for these high yielding currencies confirms that the market is not worried that a big disaster will fall upon the financial markets.

This same sentiment is shared in Japan where there have been reports that rising global bond yields has made it very attractive for domestic Japanese firms to increase their foreign bond allocations. The relationship between the Dow and carry trades has broken down over the past few days, but if the Dow fails to rebound on Monday, there is a decent risk that we may see a correction in the yen crosses. Comments by Japanese officials continued to be shrugged off by the market, but now that the yen is falling against the dollar as well, the Japanese government could be pressured into intervention. Finance Minister Omi said last night that he is watching the currency market carefully. There are a lot of Japanese economic data due for release in the week ahead. This includes retail sales, consumer prices, industrial production and the jobless rate. Higher inflation would be needed to resurrect rate hike speculations.