Yen May Reclaim Carry Trades

A recent rise in US bond yields combined with the recent dollar rally may once again make the Japanese yen the currency of choice for carry trades in 2010. The dollar/yen currency pair has become more attuned to bond yields as both currencies compete for favored funding status. Any shift in bond yields or rate expectations impacts both currencies. Richard Franulovich of Westpac in New York stated, “I think the yen will reclaim its status as the funding currency of choice in 2010. Even if the Federal Reserve raises rates by 25-50 basis points, that would mean U.S. rates will still be markedly above Japan’s.”

Employment Figures Dim Rate Hike Expectations

On Friday the dollar’s recent rally came to an end as US Labor Department figures showed that US employers shed 85,000 jobs in December. The worse than expected figures pared speculation that the Fed will raise rates anytime soon. Most experts had predicted that December’s figures would follow the same trend as November’s jobs figures which showed that US employers added 4,000 jobs in November. The ICE Futures U.S. dollar index fell 0.6% to 77.454. Some Fed officials said in the minutes of December’s monetary policy meeting that persistent unemployment might make it necessary to expend and extend asset purchase programs. Vassili Serebriakov of Wells Fargo said, “All together this report will probably work against the more optimistic expectations on the U.S. economy. It is negative for the dollar, and we are seeing it getting weaker. But we don’t expect to see a complete reversal in the dollar gains from last month based solely on this report. We need more data points.”

Euro Zone Data

Trading could be volatile this week as the results of euro zone data impact markets. Recently released euro zone data includes euro zone GDP, euro zone employment figures, German industrial production, producer price index output and other pieces of euro zone data.