Yen Rallies as Carry Trade Continues to Unwind

Bloomberg is reporting Yen Rises Toward Six-Month High on Global Recession Concerns.

The yen rose toward a six-month high against the dollar after the International Monetary Fund said the world economy is headed for a recession next year, with expansion in the U.S. forecast to grind to a halt.

The yen also traded near its strongest in three years versus the euro on speculation a global stocks sell-off will prompt investors to reduce holdings of higher-yielding assets financed in Japan, known as carry trades.

"Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen," said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington.

The stocks rout helped deter carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 4.25 percent in Europe, 5 percent in the U.K., 6 percent in Australia and 7.5 percent in New Zealand. The risk of a carry trade is that currency moves wipe out profits.

The yen also was supported as implied volatility on one- month dollar-yen options rose to 23.13 percent from 21.79 percent yesterday, when it reached 23.92 percent, the highest since January 1999. Higher volatility may discourage carry trades as it indicates a larger risk of price fluctuations.

Japan Corporate Bankruptcies At 8 Year High

In the wake of slowing export demand, Japan Bankruptcies Climb at Fastest Pace in 8 Years.

Japan's corporate bankruptcies jumped 34 percent last month, the fastest pace in eight years, as demand for exports slumped and credit-market turmoil engulfed the world's second-largest economy.

Japan's Nikkei 225 Stock Average tumbled 8.7 percent, its biggest rout since October 1987, on concern the global credit crisis will prolong the economy's stagnation.

The yen surged beyond 100 per dollar for the first time in six months after a plunge in Asian stocks prompted investors to reduce holdings of higher-yielding assets funded in Japan.

Yen vs. Dollar Monthly Chart



click on chart for sharper image

The Yen hit 103.33 in March in a breakout attempt that failed. Another rally attempt is underway now. I think it succeeds this time. If so there is blue sky ahead with no overhead technical resistance. The first hurdle is to clear is the March high.

Dollar Shortage In Korea

In other currency news Korea Won Drops to Lowest Since 1998 as Dollar Shortage Deepens

South Korea's won slumped to a decade-low as a seizure in global credit markets forced banks and companies to tap currency exchanges to meet their dollar financing requirements.

The won fell as much as 3.3 percent today to a level last seen during the Asian financial crisis, when the nation had to take out a $57 billion emergency loan from the International Monetary Fund to meet overseas debt payments. Deputy Finance Minister Shin Je Yoon said yesterday the government will check for "speculative forces" in the market and use its foreign-exchange reserves to defend the currency.

"The overall tone in the market is bleak with traders extremely cautious about taking won positions in spite of repeated assurances from the government," said Kim Sung Soon, a currency dealer with Industrial Bank of Korea in Seoul. "There's persistent real demand for dollars from companies."

Persistent Real Demand For Dollars

It seems like just a few short weeks ago everyone was complaining we were flooding Asia with dollars. Now, South Korea has to tap currency reserves to meet the demand.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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