Trading: Carry on trading

Much has been made of the impact Japanese retail investors have had in dampening down volatility in the foreign exchange markets. For a long period of time, the strategy of selling yen and buying high-yielding currencies has proved popular and highly successful. The weight of the yen selling has confounded the expectations of many who have predicted that the US dollar would weaken against the yen. Supply and demand has ensured that this prospect has not materialized.

However, one impact of the global credit crunch that suddenly emerged through August was the huge and at times dramatic unwinding of carry trades. Opinion seems pretty well equally divided on the meaning of this: has the shake-out resulted in the market moving back to more attractive levels, or have things simply calmed briefly before a further storm materializes?

In a research note sent out on August 24 by its equity analysts, Credit...