Yen Falls to May Lows

December 15, 2013 in Forex Fundamentals and News

In the last month, the Japanese Yen has been one of the biggest movers in the forex markets, meeting major selling pressure against most of its commonly traded counterparts.  Even against the US Dollar (which has also shown relative weakness), the Japanese Yen has been sold-off in most cases.  Most of these moves have been propelled by market stability, which tends to favor a common forex trading strategy called the “carry trade.”  In the carry trade, investors will use a low-yielding currency (with low interest rates) in order to fund long positions in higher yielding currencies (those with higher interest rates).  The investors gains on the positions when holding the trade for long periods of time, as the interest rate differential between these two currencies continues to accumulate.

The Yen started to stabilize early in the week, but is still slowing losses of 0.3% for the period.  USD/JPY is showing only modest pullbacks from the 103.40 level that was posted on Dec. 3.”  This latest rally brought prices to the highest levels since May of this year.  Against the Euro, the Japanese currency fell 1.1% to 140.61.  This activity compares to the activity seen in the EUR/USD forex pair which hit highs of $1.3680 during the same period.  Given the current environment, macroeconomic factors are positioned to encourage risk taking behavior in most of the market activity going forward.

Carry Trade Environments

With most of the global economy showing steady improvements in manufacturing, job hiring, unemployment rates, and overall growth, there is a strong case for risky positions going forward.  For currency markets, this means that carry trades are likely to remain in place for the market majority in the coming months.  Carry trades tend to work best in improving market environments, as this encourages risk and brings the stability that is needed to capitalize on interest rate differentials.  This could start to change, however, if the Federal Reserve starts to cut back on stimulus, as this would put markets in flux as investors would be forced to re-position for a changing financial environment.  For resources in forex education, Teletrade has some offerings that should be considered.

Given all of this, the Japanese Yen is likely to remain under pressure, as it is the lowest interest rate currency in the majors.  So from a comparative perspective, this heavily favors currencies like the Australian and New Zealand Dollar as this is where investors can find the highest interest rate yields for positions held over the long term.  Most of the move in these currencies has already been seen, however, so it makes sense to wait for pullbacks before establishing new positions in the carry trade outlets.

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