Japanese Yen Continues to Fall, Pushing Carry Trades Higher

Demand for carry trades continue to be strong with the Japanese Yen falling to a new record low against the Euro and decade or multi-decade lows against other currencies. Optimism about global growth following last week?s US non-farm payroll numbers has everyone riding happily on the carry trade bandwagon.

The rallies are becoming overextended of course and the risk of some action by the Japanese government is increasing, but until carry traders have a reason to bail, they probably will not. There is no major US economic data due for release until Thursday. Between now and then, carry trades could react to the heavy Japanese economic calendar that includes the current account, CGPI, consumer confidence, and the Bank of Japan interest rate decision. Part of the reason why the Japanese Yen has been performing so poorly is the fact that the interest rate curve is not pricing in a rate hike this week. However with the stock market rising and oil prices increasing, the Japanese government may want to shore up some demand for the Yen by hinting that they are looking to raise interest rates in the months to come. We are finally beginning to see some signs of growth with machinery orders increasing 5.9 percent in the month of May. Unfortunately there is a limit to how much benefit the weak yen can bring to the economy. What Japan really needs is for the increases in corporate profitability to translate into increased wages for employees because consumer confidence remains weak. The latest Eco Watchers survey reported the third consecutive monthly drop. If the man on the street is pessimistic about growth, how much are they really expected to spend?