Thursday, March 20, 2008

Risk Aversion Lifts Carry Trade

Since July, the Japanese Yen has notched a stellar performance in climbing 15% against the Dollar, without garnering much attention. Within the last week, however, analysts have begun to take notice, as the carry trade temporarily collapsed and the Yen appreciated by another 3%. 'But Japan's Central Bank is no hurry to raise interest rates,' you are probably wondering. 'What on earth is all the fuss about?' Volatility, the sworn enemy of carry traders has exploded. Global capital markets, including the US stock market, are in a state of turmoil. The financial services industry, the perennial bulwark of the US economy, is set to record its worst year in recent memory. Leading the way, so-to-speak, is Citigroup, which recently announced that it will write-down an additional $10 Billion in worthless subprime paper and will also receive a proportionately large infusion of capital. Cue exit music for carry traders. Bloomberg News reports:

"The global and risk environment is dominating yen pricing,'' said Chris Turner, head of currency research at ING Financial Markets in London. "There's risk aversion in the background.''

Read More: Yen Rises as Traders Pare Carry Trades on Credit-Market Losses

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