We know that risk sentiment remains the primary driver of the Japanese yen because political turmoil has recently emerged and Japanese economic data has been absolutely abysmal, but yet the low-yielding currency has remained strong against its foreign counterparts.

This remains the case, as the currency gained across the majors, but especially so against the high-yielding Kiwi and Aussie dollars. What gives? With global credit risks remaining high and equity markets susceptible to sharp decline, traders deleveraging and pulling money out of carry trades. Furthermore, calls by PIMCO manager Bill Gross for the US government to bail out mortgage lenders like Fannie Mae and Freddie Mac rattled investor confidence, as he suggested lack of action would lead to a “financial tsunami.” Downside potential remains for the credit and equity markets, and as a result, my bias for the Japanese yen going forward versus most of the majors: bullish.


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