Rising oil prices and strong US job growth sent carry trades to fresh highs today. With the labor market sparing the US economy from a major downturn, the market is hungry for risk and yield.
Selling of the Japanese Yen has been so strong that the currency hit a new record low against the Euro, a 20 year low against the high yielding New Zealand dollar, a 16 year low against the Australian dollar and a 14 year low against the British pound. In other words, the Yen crosses hit decade and for some, multi decade highs. Since the beginning of the year, crude prices have increased over 40 percent. Oil prices have a big impact on inflationary pressures both here in the US as well as globally. The higher oil prices rise, the longer central banks will keep interest rates high, which in one word, boils down to CARRY. $80 oil is now in focus and as long as prices continue to climb, the central banks of these respective countries have no choice but to leave interest rates at their currently lofty levels, keeping demand for carry trades intact. The Japanese Yen has now fallen to levels critical enough for Prime Minister Abe to start warning that Japanese authorities are “always watching currencies carefully” and that “rapid moves are undesirable.” With the Bank of Japan rate decision scheduled for next week, we would not rule out the possibility for another rate hike just to shore up demand for the currency. Aside from the rate decision, Japan will also be releasing their current account, domestic CGPI, consumer confidence, and industrial production figures.