Tuesday, October 28, 2008

The Debts of the Lenders: The End of the Carry Trade Part 4

As I said in my earlier article, Japan will go to any lengths to debase its currency. One possible method is establishing unlimited or low conditionality swap lines to be immediately implemented between Japan and the emerging markets.

This is one sneaky way for the Japanese to sell yen w/o cutting interest rates. By sending yen to hard hit commodity currency countries (like Australia and S. Africa), the central bankers of these nations are able to buy back their own currencies on the spot markets.

So, watch the JPY/AUD, JPY/Kiwi, and JPY/Rand as they will be the first pairs to reverse.

However, upward pressure remains on the yen from domestic Japanese fund redemptions as well as hedgies unwinding their carry trades. We won't see those dramatic 10% appreciations overnight but a steady appreciation of the yen looks to be in the cards.


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