LONDON (SHARECAST) - The Japanese yen continues to devalue across the board, but is setting older records on higher-yielding currencies, suggesting that perhaps the 'carry trade' is becoming more attractive for traders.
The USD/JPY reached as high as 99.67, the highest since May of 2009, but resisted reaching 100 yen to the dollar in its first attempt.
The 100 threshold is expected to be reached in a matter of time. Analysts say that the dip may have been a result of profit-taking, but that traders will continue to put in new shorts.
"Investors have been quick to use any setback to put on new short yen positions so I don't think it will continue. Everything is pointing to a weaker yen and everyone is happy to go with the flow," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The euro hit a January 2010 high versus the yen, reaching 129.935 before turning around.
The yen is also declining versus other currencies but is setting older records against higher-yielding currencies, suggesting that the yen is becoming a funding currency for carry trades.
Carry trades become attractive again?
The 'carry trade' takes advantage of the interest rate spread between currencies. The Japanese yen has historically carried lower interest rates, encouraging traders to borrow yen in order to buy higher yielding assets.
However, the financial crisis made carry trades less attractive when central banks across the globe aggressively lowered interest rates.
Now, the situation may reverse. The Bank of Japan's (BOJ) unprecedented monetary stimulus has the potential to make the carry trade attractive again. The central bank's moves assures that yen interest rates will remain extraordinarily low while the yen devalues versus other currencies.
In fact, the traditionally higher-yielding currencies, such as the Australian and New Zealand dollars, are reaching older highs versus the yen.
The Australian dollar (AUD) hit its highest since July 2008 at 103.81 yen and the New Zealand dollar (NZD) rose to its highest since February 2008 at 84.49 yen.
NZD vs AUD against the JPY
Comparing the two, the NZD high goes back further than the AUD high. Although New Zealand's benchmark interest rate is 2.5% compared to Australia's 3.0%, analysts tend to look at the path set out by monetary policy.
Australia is still in a cycle of rate cuts with its latest cut as recent as last December. On the other hand, New Zealand's last cut was in March of 2011 and is seen as the most likely to revert to monetary tightening first. In fact, it had already begun to hike rates in June of 2010 before changing course. Historically, NZ had a higher interest rate than Australia, as high as 8.25% ahead of the crisis compared to Australia's 7.25%.
Carry trade operations appear to have longer term implications and those currencies with higher interest rates, or alternatively more hawkish monetary policies, may see the beginning of a stronger long-term bullish trend versus the yen.
From the BOJ monetary policy decision last Thursday until the intraday high on Tuesday, the NZD revalued 8.28% and the AUD revalued 7.03% versus the yen.
Nonetheless, the yen's rapid depreciation does not appear to be a concern for Japanese Finance Minister Taro Aso, who just today said that the yen was correcting from previous excessive gains.
