Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Housing Bubble Bursts, Subprime Loans Implode, Recession Coming - Buy the YEN!

Currencies / Japanese Yen Jan 19, 2008 - 04:58 PM GMT

By: Money_and_Markets

Currencies

Best Financial Markets Analysis ArticleJack Crooks writes: I wish I had a dollar, or maybe a euro, for every time an analyst equated the current subprime mortgage crisis to the Asian financial crisis, and every time the housing bubble was likened to the tech bubble.

With the "R" word threatening in 2008, analysts and economists find themselves turning to earlier events for guidance.


I plead guilty to making these very same comparisons, and I'm going to do it again today. Specifically, I want to tell you why volatility is returning to the markets and why that's great news for the Japanese yen ...

History Is Repeating Itself, So Listen Up!

Recession reared its ugly head in 1987 and the pain lasted until 1990. You know what happened in the interim? The currency markets went crazy!

Things calmed down until 1998, when the Asian Financial Crisis set in. The result: You guessed it ... a spike in volatility among the world's major currencies (as measured by the JPMorgan G7 volatility index).

Even though volatility quickly came down from that peak, it remained relatively high as the years following the crisis wore on.

Finally, around the beginning of the new century, things were calming down. Until, that is, the overly-inflated technology bubble burst, sending the economy into another recession.

Currencies' Volatility Moves in Cycles ...

End result: Foreign exchange volatility surged yet again!

It wasn't until after investors accepted the failure of many dotcoms that volatility finally began to wane. As the recession faded, so did unpredictability in the currency markets.

I'm sure you see my point: Volatility in the currency markets follows a fairly predictable pattern. When crisis strikes or recession sets in, the currency markets turn erratic.

And right now, there are plenty of reasons for the cycle to start all over again ...

Housing Bubble Bursts, Subprime Loans Implode, Recession Coming!

One year ago, the JPMorgan G7 volatility index was at a record low. Sure, the housing bubble had already begun deflating, but the subprime meltdown had yet to wreak havoc on the financial markets and recession was a very distant threat.

Conditions were calm and predictable — borrowing rates were low and global markets were rising as far as the eye could see.

It was an ideal environment for the carry trade, borrowing on the cheap and investing in high-yield plays.

Traders didn't have to do very much to make serious profits. They just borrowed cheap money from places like Japan, where interest rates were low and exchange rates were fairly stable.

Then, they plowed it into pretty much anything else that struck their fancy. It was a golden ticket to easy profits.

But Now, Things Have Gotten Risky Again!

In December, volatility spiked to levels not seen in more than nine years.

Volatility Explodes to Multi-Year Highs!

At the same time, the Japanese yen has experienced a substantial rally versus most other major currencies.

Reason: Volatility is anathema to the carry trade. And the yen is a traditional safe haven for traders.

Traders can no longer sit back and rake in returns from yield differentials or the difference in various interest rates.

Prices are moving all over the place. The carry trade is no longer a one-way trip down easy street. In order to be successful, traders need to switch their bets.

So, they're doing the same thing they did during recession in the late 80s ... the Asian Financial Crisis in the late 90s ... and the dotcom bubble eight years ago ...

Traders are turning to the Japanese yen to save their bacon!

Yen Is Poised to Rally Further as Risk Rises

Think of it this way: If you borrowed cheap money to buy something else, but that something else started falling in price you'd want to cut your losses and pay off the loans, right?

Well, that's precisely what's happening now. Investors and institutions inside and outside of Japan are pulling away from risk and repaying their yen loans.

Plus, a growing number of traders are also buying up the yen for pure speculative purposes because they know that the yen will rally against the U.S. dollar and higher-yielding currencies.

Historically, this directional shift is the way market bottoms are often made. And while there are no sure bets, I sure think the Japanese yen has plenty of upside ahead of it.

Best wishes,

Jack

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in