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Themes sweep through currency markets like lions though wildebeest. Today, traders are howling about commodity prices and relative changes in terms of trade. Sometimes current account deficits are the primary concern. Last year’s big theme was the carry trade, where investors favour high yielding currencies, such as the New Zealand dollar, at the expense of those such as the yen offering low rates of interest. But, of late, carry trade chatter seems to have faded.

Why? One reason is that much of the dreaded unwinding of carry trades has happened – although it did not cause the dislocation in currency markets many feared. Data are extremely fragmented, but based on discussions with Japanese officials and hedge fund consultants, Lehman estimates that outstanding yen carry trades have fallen by about 80 per cent since the frenzied highs of last June. Chicago futures data show that investors have been running net long yen positions for months, having been short all last year.

But global hedge funds are not the only carry traders. Japanese individuals, from day traders to housewives chasing yield, have also been significant sellers of the yen. Here the information is mixed: for example, the net number of long Australian dollar/short yen futures contracts traded on the Tokyo Financial index has more than halved since last August. But the bet, which was approaching last year’s highs as recently as March, is still firmly against the yen.

It seems that the rising yen, however volatile, has finally stopped margin traders from adding to their carry positions when the currency jumps. Longer-term Japanese investors are still attracted to the near double-digit interest rates in Australia and New Zealand, which between them account for more than half of the long bets against the yen on the TFI. But these positions, too, could reverse quickly. Punts on the kiwi dollar have almost halved in the past fortnight on evidence that New Zealand’s economy has hit the wall. Mrs Watanabe is looking increasingly unsure of herself.

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