| A Crossmarket Forex Strategy: The Yen and U.S. Treasury Save Haven |
 In times of great financial uncertainty, such as the post-Lehman bankruptcy of 2008, global investors seek a fallout shelter to protect their assets. Two sought after save havens are the Japanese Yen and U.S. Treasuries. The Yen and U.S. Treasuries have a tight correlation, but not necessarily a causation. Crossmarket analysis helps the Forex trader understand why these two seemingly separate entities are the safest ports in the storm.On the surface, it may seem a little odd that the Japanese Yen is a safe haven investment. In tough economic times, retail demand wanes. It makes sense that Japan's GDP would suffer. Consider all of the consumer goods producing companies in Japan: Yamaha, Sony, Toyota, Mitsubishi, Honda, Kawasaki, Hitachi...the list goes on. However, consider the Bank of Japan's interest rate policy, and the picture becomes clear. Japan has, historically, very low interest rates. The Bank of Japan is an avowed fighter of Yen appreciation since global exports are such a critical component of Japan's economy. The weaker the Yen, the cheaper those good become on the global market. This makes Japanese goods more attractive to global consumers. When hunting for a loan, you'll likely look for the best interest rate, and the Bank of Japan has one of the lowest. In fact, Japan's interest rate has been under 1% since 1995, and has sat at 0-0.1% since 2001. When business is booming and loans are en vogue, financial institutions will “borrow against” the Yen since it is so cheap. This drives the demand, and the subsequent value of the Yen down. In 2008, when credit and lending came to a screeching halt, many financial institutions were forced to repay their own debts. Since so many had “borrowed against” the Yen, they had to buy back all of that Yen in order to cover their balance sheets. This has driven the demand, and subsequent value of the Yen up, and is a sign to Forex traders that a “flight to safety” by the market movers is occurring. Therefore, a “flight to safety” should be implemented in the trader's Forex strategy. Yen values have an important crossmarket correlation with US Treasuries. Treasuries have long been viewed as the safe alternative to individual stocks or commodities. Commodity prices hinge on consumer demand, and individual stock holdings carry the risk that the business could fail. Purchasing debt from the United States, however, is seen as a safer alternative investment since there is less likelihood of US debt failure than an individual business failing. In uncertain or unhealthy economic periods, US Treasuries rally as a flight to safety is seen as the best possible investment. Treasury values are best seen through their yield. As more money is invested in treasuries, yields will drop. Increasing yields signal a flight from US Treasuries and into riskier assets is occurring. A crossmarket analysis Forex strategy compares the Yen and US Treasuries, and seeks confirmation. Yen appreciation coupled with failing US Treasury yields gives the Forex trader confirmation that a flight to safety is occurring in multiple markets. Yen appreciation and rising US Treasury yields should give the Forex trader pause, and he or she should consider further evaluation before taking a position on the Yen. |
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