The yen and Swiss franc are liable to weaken slightly further in the near term, but heavy selling pressure remains unlikely at this stage.

Carry trades struggled to find direction last week due to divergence within the credit and stock markets. Global stock markets were generally firm, but there were increased credit fears with the iTraxx crossover index at a record high.

There were reports of a support package for Ambac late in US trading on Friday and this helped push Wall Street stronger

This trend continued in Asia and European trading on Monday with stock markets continuing to gain ground. Crucially, there has also been an easing of credit stresses. With credit and equity markets pointing in the same direction, there have been gains for carry trades with weakness in the Japanese yen and Swiss franc.

The favourable trend could continue in the very short term, but caution will still be a very important influence and aggressive selling of defensive currencies remains unlikely.