The Federal Reserve’s emergency rate cut has helped carry trades rebound across the board.
The question now is whether those gains can be sustained. Judging from the price action of many of the Yen crosses, further gains may be difficult since the rallies in USD/JPY, EUR/JPY and GBP/JPY have all stopped short of yesterday’s high. How Asian stocks behave will be the key to determining if the gains will last. Asian stocks have sold off aggressively over the past 2 trading days and if there was a catalyst strong enough to drive a recovery, it would the Fed’s surprise interest rate cut. The overall market environment is still not favorable for carry trades with the markets still risk averse, volatility remaining high and central banks around the world embarking on a global easing cycle. Even though the Bank of Japan kept interest rates unchanged at 0.50 percent last night and warned that the next move on rates would be up, we expect them to leave interest rates at the same level for the remainder of the year. One key point that is worth paying attention to is the comment from Finance Minister Nukaga who said that the government is not thinking of large scale forex intervention. As USD/JPY neared 105, many traders questioned whether the BoJ would step into the markets to artificially push down the value of the Yen and according to Nukuga, they won’t.