One of the major indicators that could help investors/traders understand the direction of the global equity markets is the movement Dollar-Yen Movement.
A currency in general appreciates if the interest rates offered by the government is high compared to the interest rate offered by the government of the counter currency. Moreover, the currencies of the developed nations also appreciate against their developing counterparts because they are more liquid and accepted globally vis-a-vis the developing market currencies which are not highly liquid.
However, the one peculiar character YEN has that it is also regarded as a safe heaven currency. In the time of economic crisis investors want to hold yen as a flight for quality investments. Over the last few months the way YEN has appreciated despite the fact that the currency offers least amount of returns to the investors. The fundamental reason behind this is that the Japanese economy is gripped with negative inflation is also a net creditor to the world, thus its currency is much more stronger and hence at the time of crisis it offers good reasons for capital preservation.
The only thing this suggests the fact that the investors from all over the world (except India) are in a continuous process of booking their profits form all the risky asset classes that has given a tremendous run up over the last 1.5 years and probably parking their investments in YEN.
Moreover, the current one week rally especially in the Indian markets has also gone parallel with a over 2% depreciation in YEN. Thus, I strongly believe that one should keep a strong vigil on the USD-JPY movement and should start booking profits if yen strengthens form here, the level of 85 should act as a good level to act on.
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