Unsurprisingly the fact that the Dow failed to slide for another day has led to a rebound in carry trades. Yen weakness remains the predominant theme in the markets which indicates that risk seeking appetite remains high. In fact, the appetite is so strong that USD/JPY hit a fresh 4 year high today while AUD/JPY reached a new 15 year high.
Part of the weakness in the Yen can be attributed to the smaller than expected trade surplus in the month of May. Even though the Yen was weak, the drop in the US dollar reduced the country?s demand for Japanese exports. Each piece of disappointing economic data only further postpones the Bank of Japan?s next interest rate hike. Like the US, there is no economic data from Japan until next week, when the Japanese economic calendar picks up significantly. Therefore carry trades will continue to be at whim of the US equity markets. Do not underestimate the power of the carry; it will only die when the rally in the Dow comes to an end.