Some traders or economists would argue that with so many central banks yielding such low rates, the carry trade is not as popular anymore. However, I disagree. If we are in a world where everyone is seeking yield, no matter how small. I think there is a good amount of money hiding out in carry trades these days. A great example is the AUD/JPY where the RBA has rates at 2.25% and the BOJ who is at .10%.
The first chart I would like to look at is the AUD/JPY weekly chart, which as you can see below, is approaching some critical trend line support. Also, please note we have made a “lower high” in 2014 vs the high in 2013:
Next is the SPX (yellow line) and the AUD/JPY:
If you notice back in 2012 the AUD/JPY rallied sharply, that was when PM Abe was elected and implemented his three arrow approach of fiscal stimulus to the economy, dubbed “Abenomics.” That created a divergence between the SPX and the AUD/JPY (Nikkei followed a lot closer to the AUD/JPY at that time).
If you closely at the AUD/JPY now, we are developing a bear flag formation, which has targets set (technical) much lower. The question that one who owns stocks at current levels will be “will the SPX follow the AUD/JPY if it falls?”
The last couple days the AUD/JPY has been pointed lower, even when the stock market rallied 1.5% yesterday. Tonight we have Chinese Manufacturing PMI’s which could affect the AUD/JPY in the very near term.
Blake Morrow
Chief Currency Strategist, Wizetrade
Disclaimer: I do own JPY, and have been long JPY against many currencies for many weeks including the AUD/JPY
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