Why Investors Should Pay Attention to the Yen/Euro Cross

The strength of the Yen and US dollar have been quite remarkable especially since the US started this economic spiral. The theory behind the US currencies strength is that if they are in trouble, everyone else will go down first leaving the US as the last standing economy in the world.

Japan is not far behind the US, however, their currency is going up for a different reason. You may have heard the business media talk about “The Carry Trade”. Interest rates in Japan are close to zero while significantly in higher in Europe. Over the last several years, investors have been borrowing yen at low interest rates, converting the currency to Euros, and buying equities and fixed income investments that were yielding considerably higher rates than the interest rate they were required to pay in Japan.

This worked extremely well for many years. However, as markets have come off and the balance sheet of many investors have become somewhat shaky, Japanese banks have been calling in their loans. Borrowers are required to sell their investments at lower prices and convert their Euros back into Yen.

A chart showing the exchange rate of the Yen vs Euro would mirror the markets as every new low in the exchange rate has led to a new low in the equity markets. Hopefully, there won’t be further lows on the cross as there will be further lows to equity markets.

Your thoughts or comments are welcome.