February 1st 2008
Yen as Proxy for Risk Aversion
The US stock market has lost over 10% of its capitalization since reaching an all-time high in October of last year. Meanwhile, the Japanese Yen has climbed at least as much in proportional terms since bottoming out around the same time. Coincidence? At least one analyst doesn’t think so. Because of the steadfast popularity of the carry trade, the Japanese Yen appears to have developed an inverse correlation with the US stock markets. The reasoning is actually quite simple. When aversion to risk is low, investors borrow in Japanese Yen and make investments denominated in other currencies, the Dollar for one. When risk-aversion increases, as it has in the current economic environment, investors have been quick to close out their carry trade positions, causing the Yen to rise. Maktoob Business reports:
If the situation of stock markets is improving, the USD/JPY is likely to be increasing. It means that more carry trade transaction are being carried out.
Read More: Fundamental analysis – Market Correlations