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Yen Soars in Value Relative to the Dollar–Potentially Very Troubling

COMMENT: Because of the huge demand for yen in Japan right now, there is major selling of dollars for yen. As a result, the value of the yen vs the dollar has surged to record highs.  This bears watching, because a surge in the value of yen has the potential to unwind the massive yen “carry-trade”, unleashing a force across the global financial markets that would not be insignificant.

The yen carry-trade, in which investors borrow in low-interest yen and trade the yen for a higher-yield currency, is basically currency speculation coupled with asset speculation (asset speculation or speculation in whatever is purchased with the borrowed yen that are sold for another currency).  So when the yen has a big move, there are indirect movements in the financial sector associated with speculators changing their investments that were based on the “carry trade”.  That carry trade is getting serious pressure right now and, based on events unfolding in Japan, it doesn’t look like there’s going to be an alleviation of that pressure unless there’s a coordinated move by the big central banks (especially the Fed and BOJ).

A recent article discussed this dynamic.  Note that the yen carry trade was yielding around 8-9% for speculators in Jan-Feb, but smacked them for -45% this month alone.  Also note that the swiss franc is at record highs vs the dollar…this is part of the growing trend of smaller, “safe” currencies replacing the dollar as the go-to currency during times of global turmoil:

“Yen Reaches Record High Against Dollar on Repatriation Demand” by Charles Mead and Catarina Seraiva; bloomberg.com; 3/16/2011.

Excerpt: The yen rose to a post-World War II high versus the dollar as risk of radiation leaks from crippled nuclear plants in Japan added to speculation insurers and investors will redeem overseas assets to pay for damages.

The four-day rally in the yen prompted speculation the Bank of Japan may intervene for the first time since September in an effort to counter repatriation flows and shore up the competitiveness of Japanese companies. The euro fell for the first time in four days after a Portugal credit downgrade revived concern about the region’s debt crisis.

“Speculators are becoming increasingly confident about pushing the currency pair around,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “Everyone is curious to find out why they chose not to defend the 80 level. Wow. That’s all I have to say, just wow.”

The yen gained to 77.48 per dollar at 5:42 p.m. in New York after passing its post-World War II high of 79.75 reached in April 1995, from 80.72 yesterday.

“We’ve breached 79.75 and there was enormous support there initially and that’s given way with stop losses on a New York close in extremely thin conditions with absolutely no signs of the Bank of Japan and the selling has just snow-balled,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney. . . .

. . . “A surge in the yen could be a destabilizing event,” said Robert Sinche, global head of foreign exchange strategy at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “I would expect that they would intervene and that U.S. and European authorities would be fine with them intervening here. If there’s activity required now, it would be the Federal Reserve acting on behalf of the Bank of Japan.”

The Australian and New Zealand dollars dropped to the weakest this year against the greenback as concerns about the impact of the nuclear disaster in Japan spurred investors to sell riskier assets.

The Australian dollar fell to as low as 97.35 U.S. cents, the least since Dec. 2, before trading at 97.89 cents as of 8:32 a.m. in Sydney. The kiwi dollar slid to 71.30 U.S. cents, the lowest since Sept. 2. . . .


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