Risk AppetiteThe carry trade has been absolutely slaughtered over the last several weeks, and quite frankly I’m a bit surprised at just how far out of control it’s gotten. We’ve seen the Japanese yen strengthen quite drastically, but it is worth noting that there is a Bank of Japan interest rate decision on September 20 that could greatly influence where we go next. After all, the Japanese can talk a tough game, but sooner or later higher interest rates will destroy the Japanese economy. Japan is one of the most indebted economies in the world, so this is like a massive game of chicken that they are playing, and somebody’s about to get ran over.Having said that, you need risk appetite to come back into the market for this to be a viable long position. The interest rate differential does favor the euro, but I would also point out that we are approaching an area that there could be a bit of a “trapdoor” waiting, meaning that if we break down from here, it could get really ugly, and really quick. The Japanese yen has gained about 12% against the euro from the peak, which of course is a huge move to say the least.I think the one thing you can count on is a lot of volatility here, and at this point in time it’s a bit like” catching a falling knife.” While I don’t necessarily want to buy the market, I don’t necessarily want to short it either. However, I am willing to have a go with a small position to the upside if we can break above the ¥157.50 level.More By This Author:CAD/JPY Forecast: CAD Recovers Against Yen
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