Yen Weakens Again - Is Carry Trade Back in Vogue?

· Yen: Eco Watchers continues to improve
· Pound: HBOS housing survey near double digit gains
· Euro: DEM Industrial Production
· Dollar: Weekly jobless claims on tap

USD/JPY broke above the 117.00 figure as traders once again plowed into the pair re-establishing carry trades liquidated only a few days ago. Helped by yesterday’s 25bp hike from RBNZ which raised rates on the New Zealand dollar to 7.5%, market appetite for high yielding currencies returned as the lure of still materially wide interest rate spreads was irresistible for some market players. In a very volatile night of trading, the kiwi initially sold off against the yen reaching a low of 78.12 , but then rallied a massive 200 points throughout the Asian and European sessions. The greenback and the kiwi weren’t the only currencies to gain on the yen, as cable fueled by very bullish housing numbers from HBOS showing a near 10% year over year rise in prices, was also propelled higher by several hundred points on the cross.

Ironically enough, yen’s weakness comes on a night when Japanese economic data was rather upbeat. Machine Tools orders surged 15.9% from a year ago while the Eco Watchers survey reading rose to within a whisker of the 50 boom/bust line suggesting that the Japanese economic growth may be finally filtering down to the consumer level. The increase in Japanese consumer confidence should lead to an improvement in consumer spending which in turn may provide impetus fro further rate hikes from the BoJ. But for now those thoughts were far from investors minds as yield once again became the sole focus of the day.

Meanwhile the ECB is expected to raise rates another 25bp today putting further distance between European and Japanese short term rates and EURJPY also gained in overnight trade rising above the 154.00 level. Whether this latest buying spree in the high yield currencies is simply a dead cat bounce after last week’s vicious bout of carry trade liquidation or yet another up leg in the world’s longest and most popular trade remains to be seen. The long term health of the carry trade depends on the US economy. Should US growth begin to slow materially, the rest of the world in unlikely to escape unharmed. Although G-3 growth has decoupled from US in the past two quarters, the world’s largest economies remain inextricably intertwined with global growth still highly depended on US consumer demand. Thus, if US economy unexpectedly contracts in the next few months, forcing the Fed to lower rates, the secular uptrend in the carry trade may finally be broken as the global cycle of tightening will come to an end.