Yen Rises Above 103; Carry Trade Unwinding

The yen has had a major spike up in the last few days, going from 107 to just over 103 in Tokyo trading today.

Note that moves of the yen are both the result of and the cause of market turmoil. When markets get nervous, traders cut back on yen-funded positions. They must buy yen to pay off the debt, which leads the yen to rise. Others using the carry trade, who may be happy with the risky (non-yen) side of their bet, may still wind up selling out their positions as they get hit on the funding side of the trade due to the yen appreciation.

Put more simply, a move of this magnitude is a sign of a major flight from risk by investment professionals.

From Bloomberg:

The dollar declined to a three-year low against the yen on speculation the Federal Reserve will signal plans to keep cutting interest rates to avert a recession.

The currency broke below 103 yen for the first time since January 2005 and approached a record low against the euro before speeches by two Fed policy makers and an industry report that may show U.S. manufacturing contracted. The dollar fell last week against the euro by the most since December after Fed Chairman Ben S. Bernanke said some small banks may fail and unemployment will increase.

“Signs of more credit-market turmoil increase pressure on interest rates to fall,” said Greg Gibbs, currency strategist at ABN Amro Holding NV in Sydney. “Fed officials are likely to reiterate Bernanke’s dovish comments. These events pose downside risks for the dollar.”

The dollar fell to 102.93 yen, the lowest since Jan. 28, 2005, before trading at 103.10 at 11:35 a.m. in Tokyo, from 103.74 late in New York on Feb. 29…..

The yen gained against all 16 of the most-active currencies on speculation that losses linked to subprime mortgages will deepen, prompting investors to reduce holdings of higher- yielding assets financed from Japan…..

“Investors are shunning risky assets and are buying the yen non-stop,” said Seiichiro Muta, director of foreign exchange in Tokyo at UBS, the world’s second-largest currency trader. “Everything is bad as the subprime and monoline crisis doesn’t seem to be over and stocks may decline.”

Japan’s currency may strengthen to 156.00 per euro and 102.00 against the dollar today, Muta forecast.

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  1. Anonymous

    I think we need a cat picture or a horse, maybe a dog?

    The yen’s strength, which hurts Japan’s vital exporters by making their products more expensive abroad, has also helped push Japanese stocks lower. The benchmark Nikkei 225 index was down more than 4 percent Monday.

  2. Yves Smith

    Well, I’m trying to maintain some separation of news and entertainment, but Fox News doesn’t. so maybe I shouldn’t be so sanctimonious.

    Yes, the Nikkei and the yen generally move inversely. There has been very little discussion of the fact that while Japan’s domestic economy has been flagging, its export sector is robust, in large measure due to the weak yen. And it’s also not widely publicized that Japanese companies have a lot of manufacturing capacity in China. So I’ve been skeptical of the “Japan is a basket” case story its government has been perpetuating. It’s a useful fiction that keeps us from going after them for their weak currency and their huge trade surpluses, although it finally appears that the weak currency is taking care of itself.

  3. Anonymous

    How about this?

    There is a 62 percent chance the Bank of Japan will cut its 0.5 percent benchmark interest rate by 25 basis points by December, according to calculations by JPMorgan Chase & Co using interest-rate swaps. The odds were 28 percent a week ago.

  4. Anonymous

    Re: Gold’s inflation-adjusted record high was $2,119 an ounce at 2007 prices, according to analysts at metals consultancy GFMS Ltd.

    If wheat is bid up like a casino chip, we will see hyperinflation by summer 2008, and that inflated gold value may be needed to buy food by this time next year! I seriously hope The IMF , NATO or some global org takes it upon themselves to take charge of the global monetary system and do little things like keep food (wheat) from being a speculative commodity that fuels hyper-inflation….like Monday!

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