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. . . .