Sunday, April 5, 2009

The Debts of the Lenders: The Return of the Carry Trade?

Perhaps I should re-classify Japan under the "Debts of the Spenders" after considering the adventures in extreme money printing that BOJ bankers and Tokyo politicians have embarked on in the past few months.

The yen-dollar pair broke psychological resistance of 100 at the end of last week. Some bullish commentators (remember - USD/JPY trades INVERSELY so a weaker yen is indicative of a return to risk taking) are calling for a return to >110 levels which haven't been seen since last August.

Has the economic situation on the ground improved?

Errr..... not exactly. But trillions in central banker liquidity are definitely having an effect in the currency markets.

However, caution lies ahead! Aside from Q1 earnings and a still (relatively) strong dollar, the economic situation in both Japan and the US seems more indicative of traders fleeing the yen in search of another safe haven currency. De-leveraging is largely over but some trades still need to be unwound - especially the disastrous hedgie arbitrage trades in mid-March that sought to take advantage of a short common equity of financials/long preferred equity of financials play.

A vicious short squeeze in Citibank (the most widely known example but there were other financial bank names involved) decimated hedgie accounts and sparked a nearly 3 week stock market rally as panicked shorts scrambled to cover in the face of what the media has dubbed a "return to normality" and has sucked in a lot of retail money in the past few weeks.

So will the yen keep on weakening? And by extension will the equity rally continue?

Watch the Aussie this Tuesday.

The RBA (Royal Bank of Australia) is making a rate announcement on April 7 (this Tuesday) while the BOJ is scheduled to give a press conference the same day.

Why am I bringing the Aussie into this discussion?

Remember, the Aussie is a "commodity currency" and along w/the Brazilian real, New Zealand Kiwi, and (arguably) the Canadian Loonie, the cross pair trades against the yen represent the clearest direction of risk as seen through INSTITUTIONAL currency money flows. Surging or declining commodity prices are reflected in the countries that depend on commodity exports for the majority of their GDP.


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