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Carry Trades: Japan Suggests Yen Intervention Is On the Way, Australia Proves It Doesn't Always Work

Monday, 27 October 2008 22:47:26 GMT  |  Terri Belkas, Currency Strategist

Forex carry trades sold off sharply on Monday, as the Japanese yen surged more than 4 percent versus high-yielding currencies like the New Zealand dollar and Australian dollar, while gaining 1.5 percent - 3 percent against the US dollar, euro, and Canadian dollar.

Indeed, risk aversion is still intact as the CBOE’s VIX Index remains near its record high of 89.53 from Friday at 80, leaving the odds in favor of Japanese yen strength. However, the low-yielder’s resilience was somewhat surprising given comments from the G7 over the weekend suggesting intervention may be on the way, as the statement expressed concern about “the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.” However, the Reserve Bank of Australia has shown that intervention doesn’t always work, as they said they have been trying to do so for the past three days, and yet the Australian dollar has still fallen nearly 12 percent against the greenback and almost 18 percent versus the Japanese yen. Since the currency market is among the most liquid in the world, it would take a significant amount of capital to be able to move the market when the trend is moving in one direction and there is little demand for carry trades. As a result, Japan is unlikely to attempt any sort of major intervention effort until volatility dies down and the markets stabilize.

Related Articles: Japanese Yen Will Hold Its Gains As Long As Risk Dominates, Australian Dollar Losses May Continue As Very Little Support Remains

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