Yen at Work

So Mike, don't call it a comeback, but suddenly it's a very different story for the Japanese yen, isn't it? I mean, we look to a week, it's risen about 4% and it's now at seven month highs.

And let's not forget a few weeks ago, we were looking at four decade lows.

So there's a lot of catalysts at play here, I think.

Some are pointing to a bit of thinner liquidity due to the US holiday yesterday, as well just that breakthrough, that 155 versus the dollar, just sort of building on an already acceleration of bullish momentum.

But I think this all comes down to the Bank of Japan, isn't it? It's more expectations than The rate rises later this month and beyond.

But this could be a bit uncomfortable news for some of those faithful to the carry trade, couldn't it? Can you give us a bit of an explanation? What are the risks building here?

Well, just to kind of point to what you've been saying, the intervention story after heavy bouts of Bank of Japan yen buying through the last month, last six weeks, have kept everyone nervous.

So everyone's watching this rate for periodic official action within the exchange rate.

But as you say, now that we've got a Bank of Japan almost certain next week, the end of next week, two days after the Fed meeting, there is a considerable amount of repositioning, if you like, into that meeting.

And I think there was some speculation, if you remember last week, that the Bank of Japan may even go more than the normal quarter point.

I think that's a very extreme bet at the moment.

Lots of sources internally at the Bank of Japan have suggested that's not likely.

But today we got an awful lot of economic news from Japan that would certainly reinforce the rate rise.

We got real wage rises in Japan rising to 2.4%.

That's the fastest rate in five years.

And it was much higher than expected.

We also got Japanese GDP for the second quarter revised higher, as was the case in Europe yesterday.

And so that case for the Bank of Japan, what it would see is normalizing interest rates is really now kind of baked in.

It's very hard for them now to step away from that.

So does the market reposition? To the carry trade that you mentioned, the carry trade is simply where people use cheap yen funding to buy other assets around the world.

Because it's going to be less cheap to borrow yen as a result of the interest rate rise, you think some of those positions will squeeze.

They may well be put back.

You know, Japan...

Japan's interest rates would rise to still very low levels, but there is often a recalibration.

So we have to watch for ripple effects across the world, Marcus, not least within the interest rate world, but also for other assets that are funded through yen.