Forex

Carry Trades: Are They In for More Losses? With the US bond markets closed for Veterans’ Day, the equity and currency markets were as volatile as ever.


Intraday charts show US equities fluctuating in and out of positive territory with the intraday trading range of the Dow reaching as much as 181 points. The Japanese Yen crosses were in the red or negative throughout the US trading session. Today’s extensions of Friday’s losses were not a complete surprise because on Friday we had indicated that with the Dow closing “at its session lows, we expect follow through weakness in the Yen crosses at the open of Tokyo trading on Sunday.” What we didn’t expect however was the degree of the move, which in some cases matched and surpassed that of the moves we saw on Friday. The combination of stronger Japanese economic data and significant weakness in the Asian stock markets appeared to be too much for carry traders to bear. Domestic CGPI and the current account were both better than expected but stronger economic data alone would not have caused today’s move. The Chicago Board Options Exchange Volatility Index (VIX) opened at the highest level since August, when we had a big spike up to 37.50. Carry trades thrive in an environment of low volatility which means that should the VIX continue to rise, and it appears to want to, carry trades could suffer more losses. It is important for Yen traders to not only watch the Dow, but also the VIX. Tonight, we have the Japanese GDP report for the third quarter, which is expected to be firm.