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.
Also, some of the strongest currencies do not offer much of a yield. Notably, the Canadian dollar (loonie) gained 22 per cent against the dollar this year (and gave back 5 per cent of that on Monday), all while yielding less than sterling.
Two other hypotheses might work. First, Simon Derrick of Bank of New York Mellon suggests Monday’s switchback could be down to growth worries. If worried about inflation, you buy currencies like the loonie. It is backed by commodities and a conservative central bank. If more worried about growth, such currencies are the last place to be. (And stocks are not much better.)
Another radical hypothesis from Authers: the yen might have to do with Japan. It has been weak due to weak economic data. Third quarter growth was better than expected, partly because the low yen helped exports. Then traders took the hint when Japan’s prime minister warned against a strong yen in Tuesday’s FT.
As reported elsewhere in Wednesday’s FT, the yen retreated from an 18-month high against the dollar following publication of Mr Fukuda’s remarks that the yen was appreciating too fast, and warning to traders and investors against speculative moves on the currency. He also said traders and investors should take care to avoid intervention from the Japanese government.
Even so, some remain unconvinced. Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ, told the FT’s currencies correspondent Peter Garnham that while Mr Fukuda’s comments might temper yen gains, the move was likely to prove temporary.
Mr Halpenny said that though Mr Fukuda suggested the threat of intervention, he also stated there would be no rejection of a long-term trend of yen appreciation.
