February 16, 2007
The risk appetite is increasing in the financial markets and the shortest term indicators are now back at high levels. Consequently, my short term model is back to a sell signal. There was a notable short covering of put options yesterday and the 3 day put to call ratio is also moving back towards a sell. Closing long positions today ahead of the 3 day weekend and will execute short positions with a stop loss of about 1% above current levels between today and Tuesday.
The Yen moved higher against every currency and the probability a rate hike at next week’s BoJ policy meeting is growing. The question is if the BoJ yields to foreign pressure, thereby raising rates, will the whole carry trade unwind and if so, will it be orderly? The Carry Trade was covered here on my February 4th post. The last time we saw an unwind was the summer of ’98 when the carry trade ended violently and some are concerned given the size of the short position today we could witness a protracted and painful event. This must be monitored closely. The BoJ members are in a “blackout” mode ahead of the policy meeting next Tues/Wed., so we will not hear policy statements until after this time.
