The demands for carry trades are sustainable so long as the outlook for Yen continues to be bearish, meaning the currency is foreseen to be on a downtrend due to factor like widening rate differential (between Japan and other major industrialised nations).
Another factor that is likely to spur carry trades demand is the bullish sentiments over stock markets, especially those in the emerging markets.
Any signal that is likely to induce speculators to believe that Yen is tending to strengthen or stock markets are already at higher risks, there would be jitters in the markets sufficient to trigger a sell-off to cut losses.
The logic behind is simple: When Yen goes up, speculators who expose to carry trades would incur huge losses in currency exchange because now they have to buy Yen back at higher exchange rates. Similarly, when markets turn bearish, they have to exit fast and unwind carry trades to protect against losses and vice versa.
When Yen and market outlook are not favourable to hedge funds with large exposure to carry trades, the market would slump fast and turn extremely volatile as borrowers rush to buy back Yen to cover their positions.
As of this date, the Yen carry trades amount to such a huge sum that they have become a cause for concern. The gigantic size of the liquidity has made the world market (particularly the markets of the emerging economies) so sensitive that an unfounded rumour is enough to send the markets tumbling.
I have been tracking Yen and , in this year alone, I have witnessed a few times the currency pricking the market by appreciating.
If you are in the market, it may be worthwhile to track the currency's trend.
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