JPY on the Rise
October 29th, 2008 Posted in In-Depth Analysis
Traders who specialize in the JPY are feeling pressure from The Group of Seven (G-7). The finance ministers from the G-7 met yesterday and openly declared their displeasure with the recent appreciation of the JPY over the past week. The G-7 warned traders against bidding up the JPY and threatened coordinated action by member nations to depreciate the JPY.
The low yielding currency serves for carry trade and long term investors who borrow in the JPY and invest those funds in a higher yielding asset class. This play has traditionally made significant long term gains, so long as the value of the JPY doesn’t rise.
On Friday the JPY touched a 13-year high against the USD. As the once profitable carry trades grow deeper in the red, investors begin to unwind their losing positions. These positions were taken out by hedge funds that placed big bets using high multiples of leverage. The unwinding of these trades requires a trader to pay back their loan by purchasing the JPY, in turn driving up the price of the JPY.
As the JPY strengthens, the export driven Japanese economy takes a nosedive. Combine this with heavy losses in the Japanese equity markets and an stifling economic environment will begin to take shape.
The warning given to traders by the G-7 not to bid up the JPY was also followed by a statement that leaves the door open for direct intervention by the Japanese government. Japan has avoided involvement in the currency markets since 2004 when an appreciating JPY threatened to slow export growth.
To lower the valuation of a rising JPY, the Bank of Japan may begin to buy Dollars on the open market. This may or may not prove effective, given the lack of economic data surrounding the amount of open carry trade positions. Hedge funds are notorious for keeping their trading strategies secret out of fear that other funds will begin to copy their trades.
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Tags: Bank of Japan, G-7, JPY
