Crash Fuels Safe Haven Trading

The meltdown at Wall Street led investors to flee from risks and find safe haven investments.  Traditional safe haven areas have been performing well in recent days.

Rampant Carry Trades

The Japanese Yen surged forward against the Euro in a new two-year high as it posted a five-year high against the New Zealand currency.  Investors are significantly reducing their carry trades.  Generally, traders will borrow Yen at a low interest of 0.5 percent and buy high yielding New Zealand dollar at 7.5 percent.  The proceeds are pocketed as profits.

According to David Rodriguez, analyst for DailyFX.com, this profit taking is lucrative during regular market activity.  However, at times of crisis, the first to fall down are these kinds of speculations.  

The Swiss Franc is also a widely used currency in carry trades.  This is the second lowest yielding currency among G-8 economies as its overnight rate is 1.97 percent.  Currently, the greenback can buy 104.31 yen while it is equal to 1.1209.

The intensifying market jitters could fuel more investors to purchase the yen and francs in a bid to unwind carry trading.  This speculation could drive the two currencies upward by as much as 5 percent for the yen and 7 percent for the franc against the US Dollar.

Carl Delfeld of Chartwell ETF said that the Yen has not achieved this all time low since the 1980s and proceeded to advice clients on buying Yen currency shares.

$300 Billion Holdings

Japanese retail investors are estimated by Lehman to hold strong positions worth $300 billion in commodities and emerging market currencies.  As trading falls due to losses incurred by investors, the money will certainly fly back to their homeland.

Japan however can be considered safe from subprime meltdown as banks in Japan have already written off $17 billion against $500 billion across the globe.  

In a related development, the current problems Credit Suisse, small Swiss banks, and UBS could put much pressure on the franc and drive it downward.  Analysts said that Swiss banks will be forced to put up additional capital to avoid the troubles experienced by the banking sector in the US and Europe.

Tuesday saw CurrencyShares Yen spread to a four month upward swing at 96.21 in day trading but retreated at the close to 93.96.  Current yield of the ETF was pegged at 0.2 percent.  The 200-day average closing on Monday was a record first time since July 22.  It has been categorized as fairly healthy as its relative strength rating was set at 82 percent from 67 percent the past five weeks.

The Swiss Franc meanwhile got its largest gain on Monday at ETF.  Tuesday’s retreat however gave back most of the gains as it closed at 89.10.