Ever since Japanese PM Shinzo Abe won the snap election back in December 2012, the JPY has weakened sharply and steadily; however, the pace of JPY weakness as of late has become less intense, but looking at the COT (Commitment Of Traders) Report on March 4, 2014, there is still a 5:1 ratio (20K Long v 100K Short) preference on shorting the JPY, or carry JPY against other currencies. In essence, the JPY carry trade is still viable, at least for now.
Of course, everyone that’s interested in yen carry trades is paying close attention to any policy changes with BOJ (Bank of Japan) and the upcoming, much publicized sales tax hike. Here’s what BOJ has to say about monetary policy (March 11, 2014):
Note: The last time sales tax was hiked back in 1997 caused the Japanese government its economy as revenues drop due to consumers unwilling to spent. The upcoming April tax hike from the current 5% to 8% will be a true test of Japanese consumer sentiment. Although it seems that both Japanese government and the BOJ are monitoring the situation closely, as they vowed for more policy actions should situation turn for the worse.
Another interesting observation from recent market price action shows that the failure of USD/JPY pair to break a new low on the back of two consecutive months of major disappointments out of US Nonfarm Payroll releases and with the spat of risk aversion stemming from China, Ukraine, and Korea was seen as encouraging by yen traders, especially considering that JPY was the most sought after safe-haven currency in the past 4 years prior to PM Abe taking office in 2013.
All in all, assuming the Japanese economy does not fall off sharply, there is very little chance for significant strengthening of the yen, especially with BOJ and the Japanese government taking turns at daily verbal intervention, all in attempts to drive the yen weaker. I would still be looking to SELL the yen on rally and I wouldn’t be surprised to see USDJPY pair approaching the 110.00 level by the end of the year, and by all means, I expect JPY carry trades to be the most profitable trades for 2014.
Are JPY Carry Trades Still Viable?
March 11, 2014 by Leave a Comment