In an earlier note (Yields pull back as buyers take the bond bull by the horns published June, 26) we observed that it was becoming increasingly difficult to determine what the true drivers are for bond yields as the economic recovery evolves. At the same time, it’s becoming apparent that weakening U.S. yields are making the dollar ripe for carry trades as broad risk appetite maintains its appeal.

As the first half of the year grinds to a close the yen is winning a battle against the dollar for least-liked global currency. The dollar appears to be closing below its 200-day moving average against the Japanese yen on Friday and last traded at ¥101.48. There have been three or so other occasions during the course of the last nine months when the yen appeared to be gathering technical momentum using the same measure, only to rebound to multi-year highs. Only time will tell which is the best carry trade candidate.

While the FOMC is paring its asset purchase policy, economic data is turning out to be less robust given the expected second-quarter snapback. In turn that is lengthening investors’ expectations over how long the Fed will maintain its 0.25% fed funds rate beyond the asset program. But the pace of expected activity beyond the program is also causing investors to rethink any pace of monetary tightening over coming quarters. In turn the market is starting to think in terms of years and not quarters. By contrast in Japan, investors are encouraged by rising consumer prices even if it is goosed higher by the impact of higher consumption taxes.

The CPI advanced last month at the fastest pace in three decades. But at the same time the unemployment rate has fallen to its lowest since 1997. As such, yen bulls now expect the Bank of Japan to hold off additional easing. Despite the delivery of the third arrow from the quiver of Abenomics this week, it is the dollar that investors around the world appear more willing to ditch as they figure out risk dynamics under conditions of the so-called “new normal.”