The narrower trading ranges in the Japanese Yen crosses indicate that the volatility in carry trades is beginning to taper off. Even though all of the yen crosses are lower today, they have not fallen below Monday?s low. A drop in volatility is confirmed by the fact that the VIX has fallen more than 30 percent since hitting a four year high last week. Lower volatility usually helps carry trades, but in an environment where investors are scrambling for cash, interest in carry remains limited.
On the interbank level, we have heard that FX margin traders (their fancy term for individual traders) are beginning to snap up value (in carry trades) at current levels. According to our FXCM Speculative Sentiment Index however, that is not the case. Even though we have seen traders initiate new USD/JPY positions on Monday and Tuesday, the bulk of the increase is actually in short USD/JPY exposure and not long. Meanwhile, the chances for an interest rate hike by the Bank of Japan later this week is still at zero. The Bank of Japan continued to inject liquidity into the financial system last night which is a sign that they remain committed to keeping monetary policy easy. The one piece of Japanese data last night was the all industry activity index, which was weaker than expected in the month of June.