The start of the fourth quarter has been volatile for the Japanese yen (JPY). Japan’s currency swung up and down in the weeks following a change of the Japanese political guard with a new Prime Minister Sept. 26, a fresh plunge in U.S. equity prices in mid-October, and ongoing portfolio adjustments in relation to global carry trade positions (Figure 1).
Fresh concerns about the U.S. economy, centered around housing market woes, helped trigger the October equity sell-off (the 20th anniversary of the October 1987 crash might have played a part, too), which in turn decreased global investors’ appetite for risk — again — and helped drive the yen higher vs. the dollar. It’s like seeing reruns of your favorite television episode. When risk appetite in the global investment community rises, players move back into the carry trade, selling yen and buying riskier, highyielding assets. A decrease in risk appetite, however, sparks an unwinding these positions, which ultimately boosts the yen.
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