Economic data from the UK was a little thinner on the ground this week, although some thought was given to the latest employment data. Here we saw an unexpected pick up in the unemployment rate to 4.4%, against a consensus forecast and reading from October of 4.3%. This is very much a lagging indicator, however, with figures being to November. A thorn in the Bank of England’s side remains wage inflation and in line with expectations this came out at 5.6%, a pick up from the 5.2% recorded the previous month. The private sector was the key driver of this pick up, with the rate of wage growth in the public sector declining.

One area to perhaps go under the radar a little is Japan. The release of the latest inflation rate to December showed a meaningful rise, jumping to 3.6% from the previous month’s reading of 2.9%. The decision by the Bank of Japan therefore to hike rates to 0.5% was therefore arguably needed and in line with market belief. The rise of 0.25% takes their key short term interest rate to the highest it has been in 17 years. The move was made to reflect the wage growth they are currently seeing and the higher levels of inflation.

The central bank also commented that further rate increases may be seen should economic and inflation data not fall in line with their forecast expectations. Whilst the Japanese yen appreciated a little against the US dollar this was nothing compared to what was witnessed mid-2024 when an unwinding of the yen carry trade was seen. There could be a number of reasons for this. Firstly, the rate move and comments surrounding it were arguably very much in line with expectations, so the market didn’t get caught on the hop this time around. Secondly, whereas in mid-2024 a succession of US rate cuts were expected by the US, presently the market is only pricing in two, perhaps three at the most for 2025. The interest rate differential between the two currencies therefore remains at a reasonably distant level.

The difficulty with the carry trade is no one really knows just how big it is/was. After being so long in the making it would perhaps be dangerous to think that the episode seen last year saw its complete unwinding. Careful management of interest rate expectations, differentials and the impact on currencies will undoubtedly need to be seen to ensure we don’t see a repeat, which caused a significant ripple effect through asset markets. Orderly please!

This article is for information purposes only and should not be construed as advice. We strongly suggest you seek independent financial advice prior to taking any course of action.

The value of this investment can fall as well as rise and investors may get back less than they originally invested. Past performance is not necessarily a guide to future performance.
The Fund is suitable for investors who are seeking to achieve long term capital growth.

The tax treatment of investments depends on the individual circumstances of each client and may be subject to change in the future. The above is in relation to a UK domiciled investor only and would be different for those domiciled outside the UK. We strongly suggest you seek independent tax advice prior to taking any course of action.