Yen favourite to fund carry trades

As we have noted many times on these pages, implied volatilities in forex and sovereign bonds are low by historic standards.
Meanwhile, long-dated interest rates are moving up as growth hopes build.
As Steven Englander, strategist at Citi says:
"We view a steep yield curve [with] low volatility at the long-end as encouraging carry trades and long risk positions."
Many analysts favour using the yen to fund leveraged carry trades. The Japanese unit is expected to steadily weaken as the Bank of Japan becomes one of the last central banks to exit quantitative easing.
Indeed, analysts at Bank of America Merrill Lynch reckon that using the yen would work even if bond volatility rises on Fed taper fears because the currency has shown a distinct inverse correlation to such trends.
If US rates are rising this should reflect an improving US economy and will be especially positive for Mexico, and thus the peso, say BoAML.
"Having weakened over the summer, we believe
long MXN/JPY offers an attractive short-term carry opportunity within FX and one that is further bolstered by Japan-specific fundamentals - we recommend buying
MXN/JPY with a target of 8.40 with stop-loss 7.38," the bank concludes.

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