Monday, February 12, 2007

G7 and the Yen Carry Trade

I've talked some about the carry trade phenomenon and how if things were to go wrong it could unravel hedge funds by the hundreds and seize up the world financial system pretty much in the time span of overnight. The G7 meeting over the weekend for the most part sidestepped the issue which is really more about the weak Japanese Yen summarized here. Afterall, what could they do - aim a cannon at the Japanese delgation and order them to lift rates, thereby causing a quick unraveling of those carry trades?

Last week I talked about the rounded bottom chart pattern that appeared over the last 3 weeks on the chart, but that pattern has clearly been violated with the Yen probing back down at the .825 level. Where to next - .80?
One thing's for sure. No rebound in the Yen until the BOJ does something - that something being an actual rate increase. But with Japan's economy still in recovery mode, meaning that even with rates near zero deflation is still not completely plugged, don't bet the ranch on a rate cut in the near term. When/if the ECB lifts its rates next month it will be interesting to see what type of pressure they try to apply on the BOJ and Japanese government to get them to lift.

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