For better part of the last decade Japanese Yen was the cheapest currency to borrow. Low interest rate policy combined with other quantitative easing steps led to JPY being the preferred vehicle to fund speculative investments. For the most part it was in the form of a carry trade, where selling currency with low interests rate finances purchases of higher paying rates. Holder collects interest rate differential, and, with more and more people doing the same, also enjoys appreciation in currency that was purchased. Such was the case with most Yen pairs, until 2008 when the bubble burst and carry trades imploded.

Following financial crisis and similar easing steps taken in US, led to the Dollar also becoming extremely low yielding currency. As a matter of fact, in August, or September of 2009 it became cheaper to borrow USD than JPY, for the first time in 20+ years. With FED flooding markets with easy money, Dollar became primary source of speculative investments, never mind all the talk about “flight from risk” that press was heralding with every uptick in USD. This maybe coming to an end.

Recently, Yen again became the cheapest currency to borrow. This chart of short term interbank borrowing rates, shows that costs of borrowing USD have become a little higher than Yen’s. For the moment difference is largely symbolic, one needs a magnifying glass to see it, but given longer term expected policies of the two central banks, trend should continue. Over time JPY will likely become the lone holder the “cheapest” title, which should take some pressure away from the Dollar, at least in the direct USD-JPY relation.

That, of course, is one of the fundamental elements which should influence markets in the long term. In day to day trading, anything can happen, in complete disregard to any fundamental. For example, opening gaps, or lack of, happen for all kinds of other reasons, most of which are forgotten in a day. Yesterday there were a lot of gaps, some playable, some not, but who knows why they formed? One of the ones that met my criteria was in AUD-JPY.

I really like this one. It had a nice topping pattern, visible even on hourly chart, established small risks parameters and decent objective. Not great, but decent, worth the trade, which brought 46 pips. Unfortunately, not all the gaps were tradable. Even the ones in GBP, something I was paying close attention to, though large, didn’t offer good entry. Like this one, in GBP-NZD.

Price gaped down, by a good margin, but it started to close right away. Combined with large spread this was not a situation I wanted to see. Speaking of Pound pairs, trade mentioned yesterday, long GBP-AUD using weekly chart, is under way. My entry was at 1.6556. BTW, I’m still watching all GBP crosses and looking for upside breakouts, even if Pound took a beating today.

While I’m waiting for the Pound to get a life, other pairs might present opportunities. AUD-JPY could be a good sell at 82.20, with perhaps 100 pips objective. I would prefer to see this pair make a move up and then reverse. Doesn’t have to be big, 20 pips or so is enough for me. Couple of other Yen pairs look very similar, so IF the move down happens, it could be broader. We’ll see.

Mike K.