Bloomberg's surveyed experts predict 98 yen to the dollar by year end

Bloomberg has an interesting article about the carry trade, Yen Carry Trade’s Appeal Shows Japan Is Losing Mojo. I want to examine it as carefully as possible. I'm not an expert, so mostly I just want to ask the pertinent questions.

Currency strategists are more in sync than any time since the depths of the financial crisis, increasing incentives to bet against the yen after the carry trade lost money in December for the first time in 10 months.

Who are these currency strategists? Are they in Japan or America? Are they the same guys who lost massive amounts of money on Wall Street while raking in massive bonuses? Are they the same fellows who told us the US economy was on solid footing before the big crisis? I mean, I would just like to know.

Forecasts for the euro, yen and Swiss franc from 61 Bloomberg survey contributors are within 9 cents of the mean on average, down from 11 cents a year ago. They haven’t been so unified since Lehman Brothers Holdings Inc.’s 2008 bankruptcy.

Is this tongue in cheek? Right before the Lehman Brothers Holdings fallout everything was supposed to be peachy and fine, then it went kaplooy. And the article blatantly admits that just before the crisis all the experts were basically in agreement, and thus they were all wrong. Now they are basically in agreement again, heaven forbid, and this time they are supposed to be right? What?

The growing consensus signals that foreign-exchange swings will decline, luring investors to sell currencies from countries with lower interest rates to buy higher-yielding ones.

I do *not* believe in efficient markets. I presume the market is in a continuous process of readjustment. Kind of like the moon always falling towards the earth but always missing it, the market is always moving towards efficiency and never obtaining it. Okay, but even if the market is never perfectly efficient, to at least some extent differences in interest rate should be reflected in the values of the currency already (along with anticipation of changes). This is what has always confused me about the carry trade. Clearly you can only make money if you are more right than everyone else. So if there is a consensus, then I presume everyone must be wrong, because there shouldn't be a consensus. Does that make sense? A consensus to me implies the moon has started standing still and isn't moving anymore. Well, that can't be.

Japan’s currency, which fell 6.6 percent since its 14-year high of 84.83 per dollar on Nov. 27, may be the biggest loser as Prime Minister Yukio Hatoyama fights deflation and a recession.

I would never want to underestimate the willingness of any politician in any country to devalue their own currency. So I do think the yen will weaken. However, will it weaken against the dollar?

Declining volatility and the rising U.S. currency means “people are thinking about alternatives to the dollar as a funding vehicle, and the yen is the obvious candidate,” said Richard Franulovich, a strategist in New York at Westpac Banking Corp., Australia’s second biggest bank. “Not only do they already have low rates, the authorities are talking about a new quantitative-easing program. There’s a big fiscal expansion playing out under the new government, and the currency had a big rally last year.”

This is mind boggling. Okay, so the consensus is that the American dollar is pretty stable, and that Japanese authorities will devalue the yen. So borrowing in yen is attractive because it will be easy to pay it back when it is worth less (if you use it to buy dollars.) Okay. Wow. Sounds great. But wait, if that's the consensus, then should Japanese banks lend to people knowing that they will lose money on the deal? Why shouldn't the banks just invest in the foreign currencies directly? Or perhaps not lend the money out at all ... I don't know, this just doesn't make any sense to me. It's as if the banks were just there to give money away ... then again, maybe they are, at least if you work on Wall Street.

Funding the carry trade with the greenback lost money in December for the first time since February as the U.S. currency gained 4.8 percent against the euro amid growing confidence in the U.S. economy and expectations that the Federal Reserve will raise borrowing costs by June.

The Fed is going to raise rates? The US economy is recovering? It doesn't seem like this to me. Unemployment is climbing, the number of people who will default on mortgage payments will surly continue to go up. What planet do these people live on. I'm totally lost here.

Carry-trade returns will benefit this year from the yen dropping 7.3 percent to 98 per dollar from 90.84 today, according to the median forecasts in Bloomberg surveys. The franc is predicted to weaken 4.8 percent to 1.08 per dollar.

Okay so let's sum up all these predictions:

• The American economy will soon be in recovery mode.
• The Federal Reserve will begin to raise interest rates.
• Investors one and all know this, so are already beginning to borrow money in yen and invest in dollars.
• By the end of the year it should cost about 98 yen to buy one dollar and nearly everyone agrees about this.

Okay. Sounds good. Let's wait and see what happens.