When traders in Tokyo turned to their screens on Tuesday after the nation’s 10-day pit stop to change emperors, they discovered two numbers demanding their attention. The first was the dollar-yen rate, lingering just above the $110.70 level, which is where it was before Japan shut down for a protracted “Golden Week” holiday.
It still appears pressures are building behind a bigger movement. Aside from a slight firming up on Monday, after US president Donald Trump fired a few shots in the trade war with China, the Japanese currency has remained constant. The “flash crash” that some had hinted might develop during the protracted spell of low-volume trading during Japanese hours did not materialise, and retail investors trading on margin produced a little mischief.
What took some justification, though, is why the yen had not risen after Trump’s tweets about increasing tariffs on Chinese imports reignited fears of hostility and induced China’s stock market benchmark to perform its biggest one-day fall in three years.
Market tradition prescribes that, under these conditions, some variant of the old “haven trade” would boost the yen much further than it produced. When Wall Street opened later that day with a shrug at the repeated noise in the trade war, the yen sank further. That kind of sequence may remain until markets decide that global investments are expected a legitimate correction and volatility rises. For now, a long dollar-yen position is an inviting “carry trade,” as traders to borrow yen to place in higher-yielding currencies. But a spoiling of the US-China trade negotiations could stop it being so and could yet lead to Japan’s currency challenging the ¥108 level if things heat up