Rising risk aversion has caused a wave of carry trade liquidation. None of the Yen crosses were spared in the second worst day for carry traders this year. The biggest losers were NZD/JPY and AUD/JPY, which dropped 400 and 340 points respectively. Carry trades only work in a market that is willing to take on risk. With evidence that things could get worse before they get better in the US, it may be wise for carry traders to stand aside for the time being. Some economists are once again calling for a recession.
Market expectations have shifted dramatically which makes it a far more unstable environment than a few months ago. Tonight?s Japanese data is not likely to matter at this point because the problems are far more severe than the risk of a rate hike by Japan. Consumer prices and retail sales are due for release. Inflation is expected to remain nonexistent while retail sales are predicted to rebound. A rebound in the Yen crosses will however be contingent upon whether we see any follow through selling in the US stock market.