Quantifying The USD-JPY Carry Trade Ratio Following Australia's Interest Rate Announcement
The earlier announcement of a 25 bps rate hike by the RBA was not a big surprise. What was, however, was the knee-jerk reaction by both the USD and the JPY, and specifically the relative sizes of said jerk. As both currencies are funding currencies to AUD longs, the relative reactions provide a good, if crude, way to quantify the relative concentration of shorts in any given currencies (USD and JPY). Then again, it may merely indicate that tonight's USD-trading night shift at Goldman had much more Red Bull than the OZ one. In either way, both the initial knee jerk reaction as well as the subsequent follow through, indicate a roughly 50-100% greater concentration of dollar than yen-based shorts: in other words: the carry ratio funded in USD and JPY is between 2:1 and 3:2.
Chart 1 below presents the relative reaction following the immediate announcement (aka the kneejerk). The drop in the Yen was -0.2% compared to the dollar's -0.4%.
Chart 2 presents the stabilized follow through. While the Yen was still at -0.2%, the dollar had tapered off to -0.3%.
A 50-100% greater carry funding in USD vs JPY would not be surprising, especially since the dollar is backed entirely by rapidly deflating housing assets. However, any announcement by the BOJ that would even hint the country is adopting QE, and expect the carry ratio to shift significantly back in the traditional, Yen-based, direction.