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Last year from about the midde of December 2005 to about the middle of January 2006, the forex currency pair GBP/JPY dropped about 1200 pips. Most experts agree this was due to carry traders taking profits on their forex carry trades for the year. This year, since that big drop the GBP/JPY has risen about 2400 pips. Are we in for another big unwinding again this December?
A lot of the data released from Japan in the last few months suggest that the carry trade should remain strong for at the next couple of months. This was somewhat reversed recently as a stronger than expected Japanese GDP was realized for October. Furthermore, there have been steady rumors that the BoJ is considering raising interest rates to .5%. Certainly we're in for some kind of correction in December, right? Ultimately, the BoJ will probably have the ultimate say on this. The BoJ is notorious for intervening when it feels currency traders are moving the Yen from wherever it is they want it to be. If they feel the JPY is getting too weak, they will likely intervene and bolster their currency. This would spell doom for a lot of carry traders who have dug in for the long haul. Regardless, even if the BoJ does decide to strengthen the Yen, and even if the rate is raise a quarter point, and even if some carry traders take some profits for years end...even if all of these events transpire, the rate differential between GBP (not to mention NZD, AUD, and the USD) and JPY is so wide that the carry trade looks like it will still has some strength well into 2007.
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