FXstreet.com (Barcelona) - Carry trading has lost its appeal among Japanese traders. Japanese have been the largest carry trade buyers in the past but according to Kathy Lien, Director of Currency Research at GFT, the situation seems to have changed in the last year: The Japanese have always been the biggest buyers of carry trades but having been burned significantly, they are finally starting to cut their losses. According to the latest data from the Tokyo Financial Exchange (TFX), one of Japan's largest retail FX brokers, traders have become a net seller of GBP/JPY.
GBP/JPY has lost 48% of its value after peaking above 250 in July 2007, Lien observes that the easing of the BoE's monetary policy has prompted the Japanese to sell GBP/JPY: The positioning data suggests that the Japanese have been sitting with their long carry trade positions for as long as they can and now that interest rate differentials have compressed so significantly, they are finally bailing. At TFX, 69 percent of all GBP/JPY transactions as of Feb 3, 2009 is to sell the currency pair.
Furthermore, Lien affirms that the GBP/JPY has been largely affected than other carry trade pairs, as the interest rate differential is falling much faster: Japanese investors have been hesistant of shorting carry trades aggressively because they still have to pay interest on any short positions. With GBP/JPY however the interest rate differential rate differential is falling and falling fast. As the cost of shorting carry trades fall, we could see more interest from Japanese retail traders. In the meantime however, for the pairs that still have higher interest rate differentials like AUD/JPY and NZD/JPY, short positions will not be held long.