The rapid appreciation of the yen is putting an end to a lucrative emerging market trading strategy. Since the Japanese authorities took over the yen in late July, a J.P. Morgan Chase emerging market currency index has plummeted by more than 4% in yen. This week, the market speculates that the Bank of Japan may raise interest rates further, traders scramble to close their Japanese yen financing arbitrage deals, and the decline has further accelerated. Although the US dollar is weakening and market expectations of the Fed's interest rate hike are cooling, boosting the earnings of emerging market currencies against the US dollar, concentrated liquidation of Japanese yen arbitrage transactions is increasing the volatility of the entire foreign exchange market. J.P. Morgan Chase tracks the January implied volatility of major emerging market currencies against the US dollar, which soared to a nearly three-month high this week. This is also bad news for foreign exchange transactions in emerging markets funded in US dollars.

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