Carry trades have sold off significantly over the past few weeks with GBP/JPY being the biggest loser. Having fallen from a high of 251.15 down to its current level of 241, it only took six trading days for the currency pair to erase the 1000 pip rally that was 3 months in the making. NZD/JPY, AUD/JPY and CAD/JPY all suffered the same fate, having each registered over 700 points in losses. As one of the most popular and successful trading strategies over the past few years, the strength of recent losses has caught everyone by surprise.
To the dismay of Mrs. Watanabe and anyone still long carry this is not the worse case of carry trade liquidation that we have seen. Between December 2005 and June 2006, our Dynamic Carry Trade basket had a drawdown of as much as 13 percent. From its peak last Monday, the portfolio is down 7 percent. There is still more room to fall before we get to 13 percent, which is the biggest drawdown that the portfolio has seen over the 20 past years. The idea of long carry is breaking down and if the Asian markets finally follow suit, which they haven?t in the past week that could be the trigger for further losses. Last night?s Japanese data was mixed. Labor cash earnings, overall household spending, and the PMI index all weakened, but the jobless rate and housing starts improved. With no more significant Japanese data on the calendar this week, the fate of the Yen will continued to be determined by the movements in the Dow.