In financial markets, the simplest trade is usually the best one. In the forex market, it's rate differentials.
If we look at the post-covid period in the forex market, the defining feature has been yen weakness. That has come on the heels of rate hikes around the world and no change from the Bank of Japan.
In practice, how did that trade play out? Here's the monthly chart of USD/JPY
What struck me when looking at this card is that we're not materially higher than in August 2022 -- a year ago. That speaks to how quickly markets move. The vast majority of the move so far came from March-June 2022, just as the market was beginning to realize that the Fed needed to tighten.
A second wave of gains in USD/JPY came in Aug-Oct 2022 as the market realized the Fed would need to get to 5% and that the Bank of Japan wasn't planning to move. Intervention and uncertainty around the risk trade halted those gains and caused a painful retracement but we're still within that second wave.
I'd argue that recent price action argues that this trade isn't over. The global economy is improving and that's good news for carry trades. The Bank of Japan has shifted the goalposts on yield curve control but the spreads between Japanese yields and elsewhere are still wide.
USD/JPY has gained in two consecutive days in substantially different risk environments. It's also gained for the past two days despite falling US Treasury yields. That's a tell.
