Is the Japanese Carry Trade the Next Big Risk in the Market?
Let's look at the FXY, an ETF designed to track the price of the Japanese yen, to see what's going on here.
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How big is the Japanese carry trade?
Japan's government is engaged in a massive $20 trillion "carry trade" -- the funding of loans and foreign assets by borrowing low-cost yen -- that could bring unexpected risks if the central bank tightens policy, Deutsche Bank analysts warned on November 14, 2023.
The Invesco CurrencyShares Japanese Yen Trust FXY is designed to track the price of the Japanese yen. The yen is the national currency of Japan and the currency of the accounts of the Bank of Japan.
Let's look at two charts for FXY.
In the daily Japanese candlestick chart of the FXY, below, I see that that it rallied from mid-November to late December before correcting to the downside. Prices have pulled back in recent days towards the rising 50-day moving average line but I can see a bullish engulfing pattern on the two most recent candles.
Trading volume has increased since the middle of November and the daily On-Balance-Volume (OBV) line shows strength the past two months. The slow stochastic indicator shows us that prices are extended (oversold) on the downside.
In this daily Point and Figure chart of FXY, below, I can see an upside price target in the $73 area.
Bottom-line strategy: Are traders buying the FXY anticipating higher interest rates in Japan? I have no clue about that but that might be implied if the FXY continues to strengthen. Will this impact the carry trade? Probably.
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