[achiever]

In the past, the JPY carry trade was linked to the performance of global capital markets. When assets were on a bull run the low yielding JPY helped to leverage positions. Hence, any carry trade correction was always linked to the volatility of the underlying asset position causing investors who had funded via short JPY to adjust their position sizes often translating into violent position adjustments. Equity and other risky asset markets benefit from strong liquidity; add in the fact that economies entered Q3 '08 with extremely low inventory levels even the economic environment seems to support asset positions. It could therefore be argued that the bullish JPY outlook on expectations of a sharply lower equity market lacks credibility as there appears to be no fundamental reason for a sudden equity market turnaround, at least in the short-term. Heading into 2010 things may well change as economies will have worked through fiscal stimulus programmes and inventory adjustments.

The view is that JPY will strengthen as the global liability position will be reallocated from the JPY into other currencies. US- Libor rates have fallen below 1mth JPY Libor rates suggesting that the JPY is no longer the cheapest funding currency available. Other currencies including the SEK, CHF, EUR and GBP are offering funding conditions not much different from JPY. Liability-managers target funding at the cheapest rates for a given level of risk. At times when there were wide interest rate differentials working against the JPY an optimisation strategy was more or less a fruitless exercise as the result always showed the JPY as the dominant funding tool. Now with six currencies offering money market rates within a spread range of less than 40pbs (SEK, EUR, GBP, CHF, USD, JPY) the JPY will loose its dominance as the world' main funding currency. The adjustment of the funding book will require JPY buying and subsequent selling of other low yielding currencies. As this process takes place the JPY will undergo a slow appreciation process, which at one point is likely to become volatile. Unusually, both leverage and Japanese retail accounts are trading the JPY short; once these accounts hit stop loss levels the JPY appreciation will gain momentum.Trading the JPY long has as well the advantage providing investors.