Finally, since the Bank of Japan’s announcement that it would substantially increase its asset purchases with electronically printed yen (a.k.a. “quantitative easing”), proxies like Currency Shares Yen Trust (FXY) have existed in a perpetual state of free-fall. Until now. The possibility that carry traders may need to sell the dollar and dollar-denominated stock assets to pay back their yen loans is an ever-present possibility. In other words, an unwinding of the yen carry trade is something to watch out for.
The yen via FXY rapidly appreciated for the initial two weeks of October. Then the world’s central banks, primarily the Fed, discussed their flexibility with respect to keeping overnight lending rates near 0% for a much longer period than the markets had been pricing in. Thus, the yen resumed its slide. Today, however, investors may wish to pay attention to any spike or any potential for a sustainable uptrend in the yen via FXY.
It should be noted that gold, longer-term treasuries as well as the yen are components of the FTSE Custom Multi-Asset Stock Hedge Index (a.k.a. “FTSE Custom MASH Index.”). For many, an allocation to U.S. sovereign debt as well as gold makes sense in hedging against stock risk. On the other hand, why would the yen be included in “multi-asset stock hedging” when the dollar tends to benefit from a flight to safety? For one thing, the yen benefits from the unwinding of the carry trade in worldwide finance. Secondly, the yen still has cache as a “safer” currency based on Japan’s standing as one of the world’s largest economies. Moreover, the yen gained ground in 2008 and in 2011.