Intervention makes Yen more volatile and less attractive for carry trades: Strategist
We are looking at currencies like the Aussie dollar where we have an RBA which we don’t think is going to be cutting rates this year at all into next year really and minimal, I mean by the least amongst all the major central banks. We have got the terms of trade in Australia now starting to rebound quite nicely. And so overall, I think the picture looks good, notwithstanding the the tepid recovery in China, I think the Aussie is still doing well, $0.65 is a very resilient level and the Aussie against US, but we would like to pair it against currencies like the Swiss francs. You know, simply given the funding differentials, we like the carry and we think that we are in a currently in a low wall environment and that really does sort of fit into a good carry trade like the Aussie, Swiss, even the Singapore dollar versus Swiss against the yen also no, because with the yen we have issues about intervention, we have a lot of volatility. See, the problem here is that we have got the BOJ, which is not confident about Japan being able to sustain a 2% inflation goal. Demand lead right, demand LED. So it’s happy to import inflation via cheaper currency right now. Now at some point it will probably change its mind, but at the moment it’s talking in very mixed terms. So what we are seeing is you know people really looking to you know buy the dollar because of the huge rate differential with the yen and funded through yen, take the advantage of the carry and these guys then come and intervene, right. All the intervention can do, I mean I mean intervention is very limited in in what it can do given that monetary policy is working against the yen and that and and and you know against the stronger yen so. All they can do is really trick out some of the speculative elements in this carry trade who want to earn the different rate yield differential and they’re looking for a low wall environment. And So what the intervention guys are doing is upping the ante by raising volatility in the pair so that it discourages some of these people in the carry.