subject: Japanese Quake - Affect on the Global Currency Market [print this page] Japanese Quake - Affect on the Global Currency Market
I have had to start so many articles recently describing the potential effects of natural disasters to Global Currency Markets that it is becoming somewhat a tiresome task. Unfortunatelythis seems to be even more prevelant than any of the other disasters so far this year as much of Japan is brought unfortunately to its' knees.
Predictably I will start with the impact of the Quake on the Japanese Yen. Naturally in times of these disasters we expect the native currency to weaken, you don't have to be Einstein to realise that the damage to the economy and to the GDP caused by such events can not be cast in any positive light. Thus what is happening to the Japanese Yen is somewhat of an anomaly - it has gained 2.3% vs USD, 3.07% vs GBP and 4.6% against AUD in the last week! So with no desirable effect to the economy why on earth has the Yen strengthened so considerably against most major currencies? I feel it is mainly for two reasons, firstly as the Worlds' third largest economy it has a significant amount of funds invested elsewhere and a significant amount of these have been immediately pulled in order to prepare for the difficult times ahead. Insurance firms (and to a lesser extent pension firms) have also naturally withdrawn investments into the Yen, this is no doubt a key contributor for short term Yen strength. The other principle reason seems to be that carry trades have been unwound. Carry trading is when investors borrow in a low yielding currency (ie the Japanese Yen) and invest in a high yielding currency (popularly the AUD or the ZAR, currencies that have both had a difficult start to the week). Another explanation for Yen strength would be a 'flight to safety', the JPY is still seen asa safe haven currency (albeit perhaps now number three ininvestors minds) and this may play a small part in some initial strength.
I don't however expect this strength to last much past the end of the week, as the talk of the effects on the people and the land mutate into economic and financial cost then the Yen I would think, is likely to weaken. Although the area that has been predominantly hit (not including Tokyo) only accounts for a small percentage of GDP (1.5%) the cost to repair the damage is likely to be rather more significant and this should be to the Yen's detriment. Now talk of nuclear meltdown has begun to appear in the press many people have begun to leave areas that have been worse hit and even the country. The queue to re-stamp passports for re-entry in Tokyo is said today (16/3) to have been almost 7,000 people long!
As for the impact on other Global currencies the CHF and USD can be expected to be theprinciple beneficiaries from the flight to safety effect. In earlier articles I have discussed how safe haven currencies work and why the Swiss Franc and the Greenback are the currencies of choice for investors at the moment. I would expect the Franc tocontinue to gain over even the USD (both currencies have gained today).
As mentioned earlier in the article theAUD and ZAR may be the biggest losers due to Carry Trades being unwound. Both have continued to fall today and have lost nearly 3% against the bullish Yen.
I would also expectGBP to suffer as commodity prices are likely torise again, which will not aid unchecked inflation, also impacting the BofE's ability to curb it. Rising commodity prices in mainly import based economies mean that they are less able to combat inflation as they are subject to external force. This applies to some extent to the Euro also.
For a more detailed description of what may happen moving forward to Worldwide Currencies from the Japanese Tsunami please do not hesitate to get in touch.
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