The biggest moving G10 pair on Tuesday was NZD/JPY. It fell 1oo pips to 64.25 from 65.25.

For the last 5-7 years this pair has represented the carry trade. Leveraged traders borrow in yen and invest in NZD-denominated securities. The reason is that Japan has had the lowest interest rates and New Zealand the among the highest (they were the highest until last year when they were surpassed by Australia).

The yen-kiwi carry trade was an incredible trade from 2000-2007 as it marched higher and higher. The reason this trade is so lucrative is that it’s self-fulfilling. As people borrow yen move them out of the country and into New Zealand dollars, the effect drives down the yen and props up the kiwi.

Eventually, a huge speculative bubble formed leaving the yen undervalued and kiwi overvalued. When the credit cruch hit, traders rushed to the exits en masse. We can remember one particular day at the height of the credit crunch when this pair fell 13% in a single day. Imagine a country losing 13% of its relative value in a day! It was pure insanity and an incredile trading opportunity because it represented a 1000 pip move.

In the past nine months, we have seen traders re-enter the NZD/JPY carry trade and it has been trending steadily higher.

NZD/JPY weekly since 2005

On the extreme right of the chart, notice that the momentum looks to be dwindling. The Reserve Bank of Australia continues to deny the possibility of rate hikes and has warned carry trade participants that they’re going to get hurt.

In the past day, that is what has happened, as we saw a series of swift falls.

15 mins NZDJPY

We have drawn in the line at 64.03 for emphasis. Late yesterday this created a perfect double-bottom. This was an encouraging sign for the bulls but the bounce only reached 64.65 before plunging below 64.00. This is a worrisome signal for the pair and for risk aversion as a whole. Fortunately, there is some very strong support down to 63.88 but if that breaks, beware of a swift fall to 63.00.