With the carry trade 'rollover' in full swing, short dollar bets are being covered, while those in the yen are being extended, hence the 4% rise in the dollar index (DXY) during December, and the yen's devaluation. How the carry trade "rollover" goes, will determine the bias of market. That is, if the expansion in yen carry funding is quicker than the covering of short dollar trades, the markets bias could extend higher, though modestly, and more than likely, the next 6 months will be accompanied by greater volatility.
Outlook 2010: As Confusing as the Dollar and Stocks Rallying Together, January 4, 2009, GlobeAdvisor.com.
During the last several weeks, I have discussed the U.S. dollar and yen carry trades, in Carry Trades Make and Break Markets, and Does the Dollar Rally Threaten the Loonie and Commodities? I believe the subject of carry trading will be centre stage as we get further into 2010.
The point of writing about all of this, is not so you can run out and start trading currencies, although you can, but rather to recognize that the market is now getting a coronary bypass as a result of the resumption of the yen-carry trade. Deflationary economic news out of Japan means we can all breathe a little easier, since the yen now costs less to carry than the dollar. The dollar funded carry trade was destroying the dollar, jeopardizing world trade, and severely undermining the dollar's role as primary reserve currency. In essence, the dollar funded carry trade was unsustainable. Even the Japanese wanted this distinction back.
Matthew Brown, Bloomberg, writes, "For the first time since before credit markets began to seize up in 2007, investors are starting to favor selling the yen instead of the dollar to fund higher-yielding investments."
Read my latest instalment in GlobeAdvisor.com:
Outlook 2010: As Confusing as the Dollar and Stocks Rallying Together, January 4, 2009, GlobeAdvisor.com.
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