Monday, December 10, 2007

The Yen Carry Trade Is Picking Up Steam Once Again

From Bloomberg:

“Australia's dollar led gains against the yen yesterday among the 16 major currencies, rising 1.1 percent as investors returned to the so-called carry trade.

In these trades, investors get funds in a country with low borrowing costs and buy assets where interest rates are higher, earning the difference. The risk in this strategy is that exchange-rate swings erode gains from rate differentials.

The Bank of Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations, compared with 11 percent in South Africa and 6.75 percent in Australia.”

From Daily FX:

“…with prices teetering on the edge of deflation, consumption remaining weak, labor market conditions deteriorating, and businesses reflecting some slowing, the BOJ would likely be doing more harm than good to the Japanese economy by raising rates from 0.50 percent.”

From Reuters:

“Fujii at Bank of America said the dollar and other currencies were likely to be underpinned against the yen by Japanese households and individuals investing winter bonuses in foreign assets in the next few weeks.

A variety of new funds have been launched this month to lure such cash looking for better returns than those available in Japan, where 10-year bond yields are just 1.5 percent and domestic stocks have underperformed other equity markets.”

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