On the Yen

I just came across this article on the yen's recent strength and I think it just about sums up why I am bullish on the FXY (Japanese yen etf):

"``The subprime problems are not over yet at all,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second- largest publicly traded lender by assets. ` The yen will be buoyed by risk reduction.''"

"``The yen is benefiting from this unwind in carry trade positions,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``There's more bad news out there and U.S. stocks were hit pretty hard and Asian equities will have a soft lead.''"

"One-month implied volatility for the yen rose to 9.35 percent today, from 9.05 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades."

"The Bank of Japan kept its benchmark rate at 0.5 percent this week, the lowest among major economies."

So the Bank of Japan really can't go any lower with their interest rates, that will support the yen. And as investors pull money out of US assets they will buy back yen to repay their ultra low interest loans. That is the nature of the unwinding carry trade. That is a pretty strong argument that the yen will appreciate faster than the US dollar, the other side of the trade involves the falling US dollar. If the fed were to slash interest rates further then the argument would be that the US dollar will depreciate faster than the yen. Seems like a win-win to me.

Disclosure: I am long FXY calls