See how strong the yen carry trade is to the markets. "Helped INFLATE global asset prices". How long this can contiue is anyones guess. There seems to be no unwinding of the yen carry trade anytime soon. The BoJ is now unlikely to raise rates before August, which will tend to weaken the yen further and boost carry trades in the currency that have helped inflate global asset prices, analysts said. 'This is likely to encourage investors to increase yen carry trades, which will gradually bring the yen lower in the medium term,' said Toru Umemoto, chief foreign exchange strategist at Barclays Capital here. http://www.businesstimes.com.sg/sub/news/story/0,4574,234433,00.html
Mean while everything is super inflating. Sure its great that stocks are up, but gas is getting close to 4 a gallon. The world really is no longer on a loating exchange rate system. Asia wants to plan its economies
I recently read an unpublished study done on forward rates that had some interesting implications about the carry trade. Mainly, they found that in the short term, the high interest rate currency actually appreciates instead of depreciates (as expected by the interest rate parity). This in turn makes the carry trade <i>more</i> profitable than originally expected.
This makes sense initially as currency will flow to the better yield but there has to be a point when the higher yielding currency has appreciated to the point where there is much more currency risk in the carry trade. That is where we are now with the Yen imo and am long Yen future calls again hoping for a repeat performance of the earlier trade. Long gold here as a hedge. If the Yen and the $ AND gold all keep depreciating I would expect my EEM puts to pay off handsomely as it would mean that the liquidity crunch I have been expecting will play out. The flip side could be a huge rally in stocks. So an intermittent YM hedge is also called for.