Meanwhile, the logic confronting investors is that the yen can only get weaker. That makes the “carry trade” safe once more. Popular in the years before the Great Financial Crisis, when it contributed greatly to excessive speculation, the yen carry trade involves borrowing in the Japanese currency at low interest rates and parking in a currency that offers higher rates. It works unless the yen strengthens. And so money is pouring into countries like Colombia, Australia and particularly Brazil, where rates are expected to rise. Countries backed by commodities should be more durable in an inflationary environment in which raw materials prices are rising:
The all-time high for the Aussie dollar carry trade, and the near-high for the Brazilian real trade, suggest that things cannot be taken much further before something breaks. The Bank of Japan remains determined to stay dovish until it can force inflation up to 2%. The weak yen presently stands to drive up the price of imports to Japan very significantly. Westpac publishes a “real effective exchange rate” comparing the yen to its trading partners’ currencies, and taking into account different inflation rates. All else equal, the fact that Japan has lower inflation than almost everyone else should cause the yen to strengthen. That hasn’t happened:
Given the sharp fall for the yen since the index was last calculated at the end of last month, we can say with some confidence that the currency is at record weakness in real terms. Is that really what Japan desires, and will the rest of the global economy withstand it? Or will it force the BOJ to change course?
Then there’s the euro. A natural benchmark is the Swiss franc, geographically at the center of Europe and long regarded as a hard currency. The franc spiked against the euro during the sovereign credit upheavals in the summer of 2011, and again in early 2015 when the Swiss National Bank abandoned its attempt to keep its currency from appreciating too far. The franc is now approaching those levels again, and nearing parity, a point that could have a big psychological impact both in Switzerland and in the EU:
Again, can investors keep piling on to a trend that seems to be growing over-extended, and can the central bankers and politicians involved tolerate it? It’s questionable. So is whether the ground rules remain the same as they used to be.
A decade ago, when Brazil’s finance minister complained of “currency wars,” he meant that carry trades were pushing the real up and making his country less competitive. In that environment, the “war” was to have as weak a currency as possible to fight deflation. Now, with inflation the enemy, the “winners” will be the currencies that strengthen the most. To cite Vincent Deluard, investment strategist at StoneX Group Inc.:
When the economy is at full capacity, the only way to increase supply is to import: Strong currencies are needed to lower commodity bills and steal trade partners’ output. The winners of the currency wars of the 2020s will be the currencies which can rise the fastest.
On that basis, the U.S. and China seem well placed, while potential winners, Deluard suggests, include the Australian, Canadian and Singaporean dollars, the Swiss franc and the Norwegian krone. Things don’t look great for Japan or the eurozone. 
