September 5th 2006
Speculators get burned by carry-trade
Two weeks ago, I reported that the carry trade would soon come to an end, and traders would have to develop alternative strategies in order to continue profiting in forex markets. While interest rate differentials still remain sizable, it seems traders are finally beginning to take heed of this message by building future rate changes into their models. Japanese interest rates remain effectively negative, but a spate of recent data indicated that Japan’s economy has recovered from its multi-year recession. The Yen has sunk to a 20 year low in real terms, and the only place it can go is up. Those who continue to rest on carry trading risk getting burned. The Financial Times reports:
[The data] did not alter the prognosis for Japanese rates, which are still expected to remain unchanged when the BoJ meets this week – but it derailed the carry trade, as attempts to short the yen were by this point wildly overdone.
Read More: The Short View: Risk appetite
