Yen carry traders dealt New Year blow

The currency pair fell from 226.83 on December 26, when many traders entered the trade, to 214.64 on January 4. A London-based analyst said several major traders entered into long GBP/short JPY positions from December 26 to December 28 and then rolled over the trade to January 7, attracted by the guarantee of 10 extra days of interest before converting back into yen.

However, the yen appreciated sharply on December 27 on the back of newly released data that showed inflation accelerated to its fastest pace in almost a decade. Meanwhile, weak UK PMI data and bearish forecasts for the US economy contributed to a fall in the value of the pound against the yen.

Traders were left holding short yen positions unable to settle because the Japanese central bank, the Bank of Japan, remained closed from December 29 to January 3 for a one-off extended holiday period. The move not only wiped out any gains from interest rate differentials that traders had sought to profit from, but also created large losses, said a London-based trader.

Elsewhere, the US employment report for December released last Friday (January 4) showed that headline non-farm payrolls plunged to 18,000 from 115,000 in November, on consensus expectations of 70,000. Historical revisions did little to offset the report's negative surprise, said Neil Mellor, London-based currency strategist at the Bank of New York Mellon. November non-farm payrolls was revised to 115,000 from 94,000, while October was revised to 159,000 from 170,000.

"The focus of the US employment report might be quickly turning to the unemployment rate from non-farm payrolls in 2008 as the US presidential election hit full stride," said Mellor. "The jump in the US unemployment rate to the 5% level was a major headline shock to markets, prompting USD selling across the board."