Last week provided a little bit of everything for investors. We saw big moves in multiple defensive asset classes. We heard from global central banks about where they stand on monetary policy decisions. We got another round of all-important jobs data. Maybe most importantly, we may be seeing the slow destruction of one of the most popular trades of the past several years.
The yen carry trade, where investors borrow cheap yen to invest in other higher yielding opportunities, may finally be losing its luster. The yen gained 2% this past week against the dollar on the growing belief that the Bank of Japan might finally be getting ready to pull out of negative interest rates, the last major central bank holdout. The previous base case expectation was that the BoJ could hike sometime in Q2, likely in either April or June. With wage inflation accelerating to 2.0% year-over-year in January, the markets now believe the BoJ could hike as early as this month. Sustainable wage growth was the one thing the central bank was looking for before tightening policy and it appears they’ve gotten it. It could mean trouble for stocks. The Nikkei had been falling steadily throughout the second half of last week on the prospects of tighter financial conditions, but the negative impact of a lower dollar on U.S. securities is also a possibility.
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