The Dow is up 320 points and the Chicago Board Options Exchange Volatility Index (VIX) is down 7, paving the way for a sharp rebound in carry trades. There was no real news to drive the price action other than stronger than expected earnings by Wal-Mart and a 3 percent drop in oil prices.
Although it may be tempting to believe that the downtrend in carry trades is over, with the exception of USDJPY, none of the Japanese yen crosses managed to close the US trading session above yesterday’s highs. This is not to say that the rebound will not continue but the lack of any real news to support the move makes it questionable. The Bank of Japan left interest rates unchanged last night at 0.5 percent, which was right in line with expectations. GDP growth was also stronger than expected thanks to a rise in exports. Part of the Yen’s weakness today was blamed on the comments from Prime Minister Fukuda who warned against a rapid rise in the Yen, but he also indicated that he had no problems with long term appreciation in the currency. It appears that 110 is the line in the sand for the Japanese government and if we break that again we could hear more serious calls for intervention.