Rates as of 0500 GMT

Market Recap

Its said in the market that USDJPY goes up by the stairs but down by the elevator shaft. Thats because JPY is often used as a funding currency for carry trades borrowing in a lowyielding currency and investing in a highyielding currency. When these carry trades go wrong, as often happens carry trades are sometimes referred to as picking up nickels in front of a steam roller, people rush to close them out by selling the currency theyve invested in and repaying the currency theyve borrowed.

The greatest example of this behavior was in 199899, when many hedge funds bought highyielding Russian bonds and financed them by borrowing in yen. But on Aug. 17, 1998, the Russian government devalued the ruble , defaulted on its domestic debt, and declared a moratorium on payments to foreign creditors. Bam! The asset side of those trades collapsed. All the hedge funds then scrambled to unwind the liability side. They sold whatever they could to raise money US stocks in many cases and bought yen to repay their loans. As a result, USDJPY collapsed JPY soared. The selloff culminated in the week of Oct. 59, when USDJPY fell by almost 19 yen in one week, from 135.50 to 116.65! It was the most brutal move Ive ever seen short of an official devaluation.

Are we likely to see the same thing again this time? I doubt it. Thats because, as Ive said, I believe the market is overly optimistic about how high the Fed will hike and how soon it will cut. The…