Over the past few months, they have been burned by the problems in the subprime sector.  Traders and investors have learned about the consequences of aggressive risk appetite the hard way.  Before carry trades even have a chance to return to the multi-decade highs that was characteristic of the first of the half the year, there needs to be proof that the US economy has stabilized and the worst is behind us.  At bare minimum, the number of foreclosures and defaults on home loans need to fall and not rise.  It is no secret that the outlook for the US economy is a far bigger driver of Yen movements than Japanese economic data.  For example, the Bank of Japan left interest rates unchanged last night and even though the Japanese Yen actually rallied in the hours following the monetary policy decision.

 

Written by Kathy Lien, Chief Currency Strategist of DailyFX.com