Yen carry trade to come back

[Femi]

The Japanese currency is ready to replace the US dollar in a title of basic currency of curry trade, so the yen became so cheap first time for 4 months as the American currency. Interbank 90-day CD rates of in yen fell to the record low since 13 years, so Japan faces the strongest deflation that pushed the Bank of Japan to start programme for 113 bln. yen injection into Japanese financial system. International investors expect that Libor dollar rate is likely to be much higher to June 2010 than yen rate, so US economy would be recovered faster than Japan's economy. The US dollar has the most liquidity in the world. At today's absolute cheapness, it is the most popular currency in which investors borrow and with which they buy higher-yielding currencies of countries such as Australia, Brasilia and so on. However observe change of situation told that international investors should totally pay attention to the yen as basic funding currency.

In August, US dollar debt cost was much cheaper than the yen's. According to Bloomberg, Australian dollar bought by American funds made a profit of 9.9%. Brazilian real made 6.9% profit. If American funds would use the yen as funding currency, they could have made profit twice less than from the Australian dollar and would have been at the even level in the Brazilian real.

Now the situation was changed not in favour of the yen. Narrowing differential between interest rates is likely to make the yen more attractive to borrow. 6-month yen CD rates fell under the analogical dollar rates the last week. Currency easing programme performed by the Bank of Japan on 10 Dec to inject 10 trln yen into the financial system leads the yen to the weakest and most liquid currency in the world. On 10 Dec. the Bank of Japan already injected 800 bln yen in its financial programme.

[Pinalli]

Nice update friend....

The USD and JPY strength have suddenly moved back into positive correlation against the rest of the market on the developments in interest rates and risk aversion on Wednesday, though the JPY has certainly taken up the vanguard position after its recent desperate bout of weakness.

This leads us to ask where the USD/JPY throwback might stop. The USD/JPY bulls might not want to look at the last time the pair appeared to have rallied to the point of rejecting the downtrend in August, when US 10-year rates appeared to be trying to retake the 4% high for the year.