Carry trades use to be one of the most popular trading strategies for retail forex traders, but in the past year, that has changed significantly. The Japanese have always been the biggest buyers of carry trades but having been burned significantly, they are finally starting to cut their losses. According to the latest data from the Tokyo Financial Exchange (TFX), one of Japan’s largest retail FX brokers, traders have become a net seller of GBP/JPY (Related: Japanese Retail FX Positioning).
After hitting a high above 250 in July 2007, GBP/JPY has fallen 48 percent. The positioning data suggests that the Japanese have been sitting with their long carry trade positions for as long as they can and now that interest rate differentials have compressed so significantly, they are finally bailing. At TFX, 69 percent of all GBP/JPY transactions as of Feb 3, 2009 is to sell the currency pair.
Although, many of the other yen crosses have also depreciated significantly over the past year, Japanese investors have been hesitant of shorting carry trades aggressively because they still have to pay interest on any short positions. With GBP/JPY however the interest rate differential rate differential is falling and falling fast. As the cost of shorting carry trades fall, we could see more interest from Japanese retail traders. In the meantime however, for the pairs that still have higher interest rate differentials like AUD/JPY and NZD/JPY, short positions will not be held long.