Looking ahead to next week, there are few, global scheduled releases that promises to redefine general risk trends. This may actually prove a stroke of good luck for the yen as traders will be able to reconsider its sharp plunge over the previous two weeks and come up with a reasonable argument to label it a safe haven. To this point however, there are few lines of reasoning to support capital flowing into Japan seeking shelter.
Through the first leg of the financial crisis, the yen was rising as traders deleveraged direct or indirect carry trades through a need for cash, natural repatriation and frequently forced liquidations. Even though this was such a prevalent strategy during the height of the market’s risk appetite, it naturally has limits to which the capital will be fully exercised. No doubt, there is still a considerable amount of capital behind the carry trade, but most of it will be through pension funds and other bulk investors that weather long-term trends. Aside from carry, there was also weak support through Japan being the second largest economy in the world with benchmark rates that had extremely low volatility.
Now, however, it is more than evident that primary cash targets are going to experience low volatility across the global as the world’s central banks near zero. More importantly though, a semblance of safety is hard to hold when an economy is suffering as stark a recession as the one Japan has been pitched into. With BoJ economists forecasting a worse slump than the one recorded through the 4Q of 2008, memories of the bank failures and crisis of the 1980s and 1990s are called to mind.
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