By: Christopher Lewis

The Forex world is starting to see a new carry trade, albeit by default. This is because of the situation in Japan, and the fact that the nation will have to keep a free and easy monetary policy for quite some time. The rebuilding of the infrastructure is going to run in the trillions of yen, and will take several years to complete. Add to that the fact that we still don't understand all of the nuclear concerns in that country and that money will typically follow all the way from that type of situation we will see yen weakness for the foreseeable future.

This all started with the Japanese earthquake. The synonymy they came shortly afterwards simply created a double catastrophe that has crippled certain parts of the Japanese economy. Shortly thereafter, the nuclear reactor started to leak and this has only increased the pain for the Japanese citizenry. As these events started to unfold, the yen actually appreciated in value. This was because people believe that various financial institutions in Japan such as insurance companies would be bringing money back home in order to pay out claims, or even rebuild their buildings in assets. Of course, this was before the central banks stepped in.

At the absolute lows of the yen related pairs, at least five central banks stepped in and started selling the yen. This is absolutely necessary as the Japanese economy simply could not handle this kind of shock. As time went on, investors started to see that Japan was not a place they wanted to have their money and in the first place. Between that and the fact that the central banks don't want begin to appreciate, the yen pair started to rise in value - showing real yen weakness.

Within two weeks, the euro had risen over 1700 pips against the yen. While it is certainly overbought at these levels, it had smashed through to major resistance areas at the 115 and 120 marks. Because of this, the trend is certainly changed as all resistance has been simply shattered. Now it is simply a matter for prudent traders to wait for the inevitable pullback after a sharp move like this.

Because of the move described above, and several of the other currencies against the yen performing in a similar manner, there is no doubt that the trend is changed against the yen at this point. Now it is simply a matter of timing. One of the added advantages of this type of setup is that the higher yielding currencies will pay a positive swap two traders at the end of the trading day. We are looking at another form of carry trade, even if it isn't because of Japanese investors looking to buy assets abroad. It doesn't really matter, the result is the same. The Japanese yen will fall, which is perfectly acceptable for most people involved as it is priced at astronomically high levels.

As you try to jump on this train, remember that has to come back as it is it lofty levels that we find most currencies against the yen at this point in time. When currency markets move like they have over the last 10 to 14 days, massive in swift pullbacks are almost always in the cards. The best part of the pullback is being able to buy these currencies on sale.