With Volatility On the Rise This Year, Expect the Yen to Fol

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With Volatility On the Rise This Year, Expect the Yen to Follow Suit
Today's commentary is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.

Good Day Currency Traders! Very Happy

Volatility is the enemy of the carry-trade pirat

. To prove that point, Japan's economy now seems to be fading fast, while the Japanese yen undergoes a substantial rally versus most other major currencies.

Keep in mind when you think of the carry-trade, it can be any currency that's funding a carry-trade. Over the past few years, the yen has been the best currency for this purpose, because until recently the Japanese yen met all three major criteria for a successful carry-trade currency including:

Low borrowing rates (Thank you Bank of Japan!) Cool

Low volatility or weakness in funding currency (Check.)

Low volatility or strength in invested asset class i.e. where you place borrowed money from the carry-trade (Check once again for the yen.)

Up until recently, investors sold off yen because the global economy was chugging along with nary a care in the world. Conditions were calm and predictable. It seemed like we would continue with low volatility in the markets and a slowly weakening yen. Economies were growing and asset markets were rising as far as the eye could see. Shocked

With these calm trading waters, traders both outside, and INSIDE Japan were ready to take some risks. In short, it was an ideal environment for borrowing on the cheap and investing in high-yield plays.

Notice the Nikkei and the USD/JPY
Are Very Closely Correlated

It's a Whole Different Ballgame This Year Basketball

The key elements for a successful carry-trade are disappearing in 2008

The New Year has brought about increased volatility across the board - stocks, bonds and currencies. Now, the yield differential earned in the carry-trade is being offset by unexpected price action in exchange rates. No longer are investors betting down a one-way street.

Investors are now buying up the yen. Most are doing so to make good on previous bets (closing positions) that the yen would continue to fall and high-yielders would continue to rise. This group includes hedge fund managers scrambling to reduce their leverage. But it also includes domestic Japanese investors and institutions who have lost their appetites for risk.

A growing number of others are buying up the yen for pure speculation on the expectations for it to rally against the U.S. dollar and high-yielding currencies. This is the way bottoms are often made.

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Making 'Cents' of the Headlines
How Bank Holidays Affect Your Currency Trading

From our Currency Director: Sean Hyman

What Happened:

On Sunday, (Japan's "Monday,") Japan had a bank holiday known as the "Coming-of-Age Day. jocolor

" Therefore, Japan's banks were closed and there was very little trading in the Japanese yen (JPY) worldwide.

Let me explain why. A currency is most active during its country's banking day. When the banks are open, there's a lot of business and money exchange happening. At those times, a currency is most liquid in the forex markets because banks are exchanging it. This is also when a currency is most likely to trend.

What I Say:

When the banks are outside of their business hours, then the volume will be much thinner. The currency will be more likely to become stuck in a range in those times.

So it's good to know when a bank may be on a holiday because you'll know that trading in that currency will be thin at best.

How to Know if a Currency is "On Holiday"

There are several ways to find out when a bank will have a holiday. The easiest way is to check an economic calendar at the start of each week. You can find them here at:

www.forexfactory.com

www.dailyfx.com

However, if you want to look ahead more or further explore bank holidays, you can always go to a "worldwide banking holiday site" such as the one below:

http://bank-holidays.com/

Japan seems to have the most holidays. It seems like every time you turn around, they're on a holiday. However, their work weeks are normally longer so they compensate for these breaks.

When a country is on a holiday, you know that any pair that involves that currency will be more thinly traded during those times. You'll also know that any movement in the pair is because the other currency in that pair is NOT on holiday.

So for instance, EUR/JPY would be more thinly traded on Sunday night and Monday due to Japan's banking holiday. However, it can move, but that movement would almost exclusively be because of European news affecting the pair.

Keep these things in mind when you're trading currencies because it can help you avoid trading in a pair when they are in a holiday. Or it will let you know that it could be apt to range trade rather than trend during those times.

Also note that right before a major worldwide holiday like Christmas, trading will be thin across the board due to this.

Savvy traders know to steer clear of stocks on those days because the volume will be thin due to the fact that many traders are on holiday.