Home Daily Commentaries The Dollar/Yen Carry Trade Imbalance Persists

The Dollar/Yen Carry Trade Imbalance Persists

Daily Currency Update

It is upto Bank of Japan to decide if they wish to intervene. The yen declined and the US dollar surged higher again as the lack of coordinated effort to support the yen from the G7 meetings never materialized. The “carry trade” is the cause for concern. The process of the carry trade is investors seeking the benefit from borrowing a lower yielding currency like the yen to invest in a higher yielding currency like the US dollar. The environment is perfect for the carry trade to persist, leaving the Bank of Japan with a solo intervention task to support its currency. Also, adding to the market volatility is the news of US Treasury Department starting talks with primary dealers to begin buying back some of the older debt to help ease the dysfunction in the market. We are seeing US equity market rally on the news, which in turn as the US dollar slipping against its G7 counterparts and commodity-based currencies are the biggest winners.

Key Movers

On Friday in the United States market sentiment remained dampened. US economic data showed that consumer spending is weakening, as demonstrated by September’s Retail Sales coming at 0% MoM, below estimates, and August’s 0.3%. Annually based sales slowed by 8.41% YOY, while the University of Michigan Sentiment edged higher to 59.8, exceeding estimates, though inflation expectations for one year heightened to 5.1%, up from August’s 4.7%. The higher rates backdrop saw renewed USD strength and equity market weakness. The S&P500 was down 2.4% and the NASDAQ just over 3% on Friday, both effectively reversing their surprising rallies after the US CPI data from the previous day. It’s likely to be another volatile week offshore this week. US earnings season starts to kick into gear with Bank of America, Netflix, and Tesla among the companies reporting this week.

Expected Ranges

  • EUR/USD: 0.972 - 0.984 ▲
  • GBP/USD: 1.1218 - 1.143 ▲
  • AUD/USD: 0.6205 - 0.6306 ▲
  • USD/CAD: 1.3704 - 1.388 ▼