Thursday, March 31, 2011

G7 Central Banks "Carry" Markets Higher

I've seen very little written about the Japanese yen "carry trade" in the US press, but the Financial Times has done a nice job of following the story.

I first posted about the carry trade last week. Since then, the yen has weakened by 9%, and markets around the world have generally strengthened. If this trend continues, it could turn into a major story in the global markets in the next few months.

Background: the carry trade is nothing more than a strategy where an investor borrows funds in a low rate country like Japan and invests in other global assets such as higher-yielding bonds; commodities; or stocks.

The major risk to the carry trade (besides the leverage) is that the currency markets work against the investor.

However, when the G7 central banks (including the Federal Reserve) intervened in the currency markets a couple of weeks ago to weaken the yen, this signaled to the world that the yen strength would not be allowed.

Here's an excerpt from today's FT:

Analysts say that the move {by the G-7 central banks to weaken the yen}, as well as a belief in the financial markets that G7 policymakers will intervene again if necessary to cap fresh yen gains, has spurred investors to resume using the yen as a funding vehicle for carry trades. / Currencies - Yen back in favour for carry trades