Daily FX
Carry Trades: Is this Profit Taking or Liquidation?
Monday July 23, 4:48 pm ET
By Kathy Lien, Chief Strategist strategist@dailyfx.com

Fridays sell-off in the Yen crosses was driven by the fear that the problems in US sub-prime sector have become global. So far we have learned that they have not and because of that, some of the Yen crosses have recovered. GBP/JPY and NZD/JPY both rallied to decade or multi decade highs. EUR/JPY hit an all-time high before reversing. Carry traders are being more selective, but demand hasn?t abated yet.

Japanese retail investors are still taking each dip as a new buying opportunity and they will probably continue to do so unless we see a sharp 1000 pip breakdown in the yen crosses. According to an article in the Nikkei paper, the value of Japanese investment into foreign trusts has increased 56 percent. The market?s appetite for carry trades has also been fueled by their expectation of nonexistent inflation. Consumer prices are due for release this Thursday night; another negative month is forecasted. Meanwhile the LDP elections are scheduled for Sunday. The latest opinion polls indicate that Prime Minister Abe and the LDP are losing support. This has weighed on both the Japanese Yen and Japanese equities.