The “Dragon” continues to fall at the moment, as the Japanese yen outperforms almost every other currency that I have been following. At this point, the carry trade looks to be in serious trouble. Is an opportunity presenting itself?
GBP/JPY
The British pound finds itself falling against the Japanese yen again during the early part of the trading session on Wednesday as the carry trade unwind continues. The ¥207 level seems to be a major support level, having held multiple times, and therefore it is not a huge surprise to see a little bit of stability in this area starting to show itself.
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It is not so much a sterling sell-off; this is about the yen rallying, as sterling is slightly stronger against many other currencies. However, traders continue to aggressively unwind yen shorts. The catalyst right now is the Bank of Japan, as markets are increasingly expecting a 25-basis-point Bank of Japan hike next week. The appreciation of 4% over the last 5 sessions is enough to rattle the markets in general.
The catalyst right now is the Bank of Japan
The market is one that traders tend to use a lot for carry trades, but this is also a situation where the Bank of England is expected to leave rates unchanged next Thursday, so that means the interest-rate differential may shrink just a touch. U.K. yields are extremely high, and the 10-year gilt is right around 5.2%, so the British pound remains a substantial yield-advantage currency. But the directional change in Japanese monetary policy matters more right now than the absolute spread.
Overall, this is a scenario where the Stochastic RSI is deeply oversold, so people may be looking at that. But with the Bank of England coming out on September 17 and the Bank of Japan on September 18, we might see a bit of noise here. I personally am looking for value, as the carry certainly is attractive, but the question is: will we get the bounce here, or do we have to fall closer to ¥205 to see it?
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