Carry Trades: More Losses to Come

The Japanese Yen has surged against every major currency pair as the market resumes broad scale carry trade liquidation. As usual, stop losses have exacerbated the moves lower in the yen crosses.

Volume is thin this week and many banks only have junior traders left on their desks. These traders are not likely to take on any news positions and are there just to monitor levels, book trades and watch for stops. Taking on risk is the last thing that senior dealers want their junior dealers to do at this time. As a result, any rebound in carry trades could be limited. No economic data has been released from Japan overnight and none are scheduled for release over the next 24 hours. Carry trades should continue to remain weak until risk appetite returns to the market. Technically the corrections in many of the Yen crosses are now over which means that the downtrend has resumed. Meanwhile Japanese traders are also happy that their unpopular government is trying to change for the better. Prime Minister Abe has appointed a number of veterans to his new Cabinet who will hopefully push through some positive changes.

Written by Kathy Lien, Chief Currency Strategist of DailyFX.com