Japan's yen resumed its rise against higher-interest currencies Thursday, suggesting that the prospect of additional credit market losses continues to lower investors' confidence in global growth and performing assets. The yen rose as institutional investors continued to decrease their use of the carry trade.
In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.
The yen strengthened about 1.6 yen to 160.71 versus euro, about 3 yen to 201.95 versus the British pound, and about 1 yen to 108.20 versus the dollar.
Another big mortgage write-off ahead?
Currency trader Andrew Resnick told BloggingStocks Thursday sentiment is building in the foreign exchange and other markets that there will be "another, major housing-related write-off by a bank or series of banks in the U.S. or U.K, or possibly Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE) problems."
"It may not turn out to be the case, but until the market receives some evidence that there won't be bad news up ahead, a lot of money is coming out of assets and going back into the yen," Resnick said. "We're also seeing some selling ahead of the last week of August, which is a big vacation week, but the major factor here is concern about housing and mortgage-backed assets." Resnick added that he is presently flat, or had no open currency trading positions.
Geopolitical tensions re-emerge
Resnick added that geopolitical concerns are re-emerging as an issue area for investors. Russia's recent invasion to Georgia and talk of a 'freeze' in U.S. / Russia relations, if not a renewed Cold War, have renewed investors' concerns that Russian oil deliveries to international markets may be disrupted, pushing oil prices higher. In early Thursday trading, oil rose $2.20 to $117.76 per barrel.
Economic Analysis: As noted earlier, investors / readers should monitor the British pound-Japanese yen trend. Presently, the trend is lower British pound. If that trend persists in the second half of the year, that's a decidedly bearish data point for the major economies of the world, for at least the first half of 2009, and perhaps longer.
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