Forex Trading : USD/JPY and RSI
Forex Trading : USD/JPY and RSI
Risk aversion wrecked havoc on long USDJPY positions in the third quarter of 2007 as the credit crunch and the stock market swoon in late July and early August created massive liquidation in the carry trade. GBPJPY lost more than 3000 points in just one month, EURJPY lost nearly 2000 points and USDJPY dropped from a high of 124.13 to a low of 111.97 before finally finding some support.
While some of the high yielders were able to recapture parts of their declines (with EURJPY recovering nearly all of its July-August losses) there is no doubt that appetite for risk which was so prevalent during the first half of the year and which stoked the demand for the carry trade pushing the yen to multi-year lows, has now been significantly curbed. This change of sentiment was especially evident in USDJPY which has seen the weakest rebound amongst all the carry trades.
The pair has been hampered by the contracting interest rate differential between the dollar and the yen which has made the carry trade far less attractive. As the end of the year approaches USDJPY is likely to be capped on the upside as US interest rates are expected to be reduced further, while Japanese rates stand a good chance of rising if the latest economic developments in the island nation continue their positive trend. While the bulk of yen strength in Q4 is still likely to come from any additional bouts of risk aversion in the financial markets, recent economic data from Japan offers yen longs some hope that BOJ will soon begin the interest rate normalization process in earnest, reducing yen’s attractiveness as a funding currency and allowing it to trade more on its own economic fundamentals rather than just pure carry trade dynamics.
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