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Carry trades dangerous
There will also be further market interest in yen selling with a potential flow of funds into high-yield currencies. There is, however, evidence of complacency over carry trades and the risk of sharp corrections will increase due to the seasonal liquidity decline. The yen remained trapped close to 118.0 against the dollar for much of Wednesday before weakening to near 118.50 in US trading while the yen also fell to fresh lows against the Euro before a tentative recovery. The yen was unable to make any significant impression in Asian trading on Thursday. The yen will remain vulnerable on yield considerations in the short term as Japanese interest rate expectations have been downgraded and there will be further strong interest in carry trades. There will still be the risk of currency volatility as market positioning becomes extreme, especially as market liquidity will continue to decline over the next few days. It is also the case that any verbal intervention warning over yen weakness would have a bigger impact when trading volumes are low and there also appears a growing mood of complacency over carry trades which will pose important short-term risks and increase the threat of a sharp yen correction stronger. The Japanese data was stronger than expected with the trade surplus rising to JPY915.9bn in November as import growth slows and export growth remained robust. The latest data on investment flows recorded a further strong flow of funds into Japan and buying of overseas securities weakened.
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