Wednesday, November 14, 2007

As the Japanese Yen Goes, So, Too, Do Stocks -- Usually

I like the headline.
We highlighted Ken Fisher's Financial Times comments on the Yen yesterday,
Ken Fisher: It’s the yen, stupid… (Best Blog Post of the day)
FT Alphaville has more today (under the WSJ story).

From The Wall Street Journal Online:

To understand whether global investors are feeling fearful -- or optimistic -- keep an eye on the Japanese yen.

That's because the yen has become an unexpectedly important barometer of investors' appetite for risk world-wide. If investors get worried, the yen often strengthens. Conversely, when investors are willing to go out on a limb, the yen tends to weaken....MORE

Short View: Thuds, rebounds and the Fukuda/yen factor

Whether in forex or equities, this week’s pattern is the same: down with a thud on Monday, and a rebound on Tuesday. These trends are linked, says John Authers in Wednesday’s Short View column.

Plotted on a graph, the euro-yen exchange rate and world stock indices are identical. They move in tandem, with stocks falling with the euro and rebounding with falls in the yen.

Why? This is linked to the carry trade - borrowing in low-yielding yen and parking in higher yielding currencies such as the New Zealand dollar. Traders make money from the difference in yields.When stocks do well, traders are happy to put money into the carry trade. They take forex profits when stocks do badly.

But there is a snag with this hypothesis, says Authers. Futures data show speculative positions betting against the yen have dwindled almost to zero since August. This should not be surprising. At one point, the yen gained 14 per cent against the kiwi during the summer.