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Why the Yen is No Longer a Safe Haven Bid

Last updated 3/9/2009 4:56 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Japan reported a  Current Account deficit today as export demand and higher yen significantly reduced export earnings while global credit crisis lowered the value on overseas investments. Japan’s Current Account balance fell to deficit of -172.8 Billion yen from a surplus of 125.4 Billion yen a year ago.

This was the first Current Account deficit in 13 years and given the continued deterioration in global demand as well as relentless declines in global capital markets, this negative dynamic is likely to remain in place for all of 2009.  The shift in Japan from being a capital surplus to a capital deficit economy could continue to weigh on the yen for the near term.

Over the past year currency traders flocked to the yen in almost a knee jerk fashion, whenever waves of risk aversion hit capital markets. Given the fact that Japan was a net capital surplus economy, these moves were logical as the country’ s positive balance sheet provided a safe haven harbor for investors fleeing risk. However, over the past few months the correlation between USD/JPY and risk aversion has disappeared along with its vaunted Capital Account surplus, as traders no longer view the yen as an instrument of safety.

Now that Japan has joined the rest of the G10 universe in running Current Account deficits,  the yen has lost much of its safe haven luster. Trading in USD/JPY therefore has become asynchronous with risk.   Yen no longer rallies during periods of risk aversion, but still continues to weaken when risk assumption returns to the market. Given this decoupling from risk, we continue to believe that USD/JPY 100 could be possible this week if equity markets stage any type short covering rally.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.