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Yen falling and fundamentals regarding earthquake

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Yen falling and fundamentals regarding earthquake

  #1 (permalink)
Legendary Market Wizard
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Yen falling and fundamentals regarding earthquake

My fundamental understanding of markets is often quite non-existent-- according to this article, Japan and the G7 central banks are buying dollars to weaken the yen, with the yen being strong over the last week. My question-- why is the Yen stronger if Japan was just hit by a huge catastrophe?

Central banks move to weaken yen and calm markets | Reuters

Nevermind, just saw there was a page 2 and read this:

The yen's surge this week was driven by speculation that Japanese firms would repatriate some of their huge foreign assets to help meet insurance claims and pay for reconstruction.

That added to a bullish run for the currency in past years, driven by its status as a "safe haven" since the 2008 financial crisis and investors' use of it as a very low-interest funding currency for more risky investments.

I would still love to hear your thoughts.

Another article: (google is my friend duh)

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  #3 (permalink)
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I think, there are two major points to consider

Japanese Overseas Investments

The Japanese have been running export surpluses over the last decades. The $$ from the surplus have been invested overseas. The US Treasury Deparment issues monthly figures on foreign holders of treasury securities, which can be found here:

As you can see, Japan is the second foreign investor in US government securities and held around $ 886 billion in the end of January 2011. Expectations are that Japanese will repatriate part of their holdings and purchase Japanese yen to cope with the current situation. The repatriation will create an increased demand for Japanese Yen. This has been anticipated by speculators.

The Carry Trade

This involves borrowing cheap Japanese Yen and investing overseas, where interest rates are higher. The interest rate differential can be pocketed as a profit. A rising Yen is not nice for carry traders, so the expectation that the Yen may rise drives the carry trades to repay their Japanese borrowings. This also leads them to purchase Yen, so by rushing to the exits they also drive the Yen higher.

The second occurence is an example of positive feedback, which is induced by the first.

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  #4 (permalink)
Legendary Market Wizard
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Thanks FT :-)

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