View To A Kill

The Nikkei did not drop by much yesterday and the yen was largely unaffected. Shanghai dropped on rumours of a 20% stock capital gains tax. This has already been refuted by the authorities in this morning's paper. Dow Jones fell but what was more interesting was the yen's strength, no reason for the yen to strengthen but for reversal of carry trades.

1) Reversal of carry trades in yen need only be a whisper and it will trigger off fears and prompt more currency traders to buy the yen, reinforcing the fears of those who borrowed in yen to buy stocks and bonds in other currencies.

2) Does it matter whether the yen deserves to strengthen? No, it does not matter, reality rules. Will the BOJ step in, yes and the rest of the Asian central banks plus Fed will step in to assuage the weakness.

3) The big wigs do not want the yen to strengthen too much from here.

Continued fear driven selling this morning. Expect yen to stabilise and gain support from central banks later today. Calm to return. Buying on weakness yesterday was not warranted. Buying on weakness today is a better bet.