The carry trade – is this it?

 EmailPrint This Post Print This Post

Market sentiment did an about-turn last week as uncertainty mounted on the back of the credit situation going from bad to worse. The upshot of the deteriorating outlook was a reassessment of risk by market participants as evidenced by a number of measures such as the Volatility Index (VIX) and the CBOE Put/Call Ratio pointing to complacency making way for fear.

But nowhere is it illustrated more vividly than by the continued appreciation of the Japanese yen as investors unwind their carry trades. The carry trade involved borrowing cheaply at low Japanese interest rates and reinvesting in high-yielding assets. The unwinding of the carry trade is putting downward pressure on high-yielding currencies such as the Australian dollar and the British pound and is furthermore leading to the liquidation of stocks across a broad spectrum. The latter phenomenon is clearly shown by the strong inverse relationship between the Japanese Yen Index (blue line) and the Dow Jones World Stock Index (red line) in the following graph:

carry-trade.jpg

Source: StockCharts.com

A further strengthening of the Japanese yen, on top of a barrage of other slumping economic and market factors, could spell bad news for financial markets in general. In short, this week promises to be a key week for financial markets and investors should exercise extreme caution.

Did you enjoy this posting? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

OverSeas Radio Network

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

February 2019
MTWTFSS
« Jan  
 123
45678910
11121314151617
18192021222324
25262728 

Feed the Bull