May 7, 2010 / 4:05 PM / in 9 years

Sharp move in yen trades may have sparked sell-off

NEW YORK, May 7 (Reuters) - A quick, sharp plunge in Japanese yen currency crosses in early afternoon trading may have helped spark Thursday’s broad sell-off in U.S. equity markets, a currency analyst said.

“In early afternoon, right before the stock market sell-off, euro/yen and dollar/yen were the first to move sharply lower,” said Boris Schlossberg, director for currency research at GFT in New York.

“As they tumbled and the yen spiked up, massive automatic sell orders and algorithmic trading kicked in, leading other yen-correlated markets, such as oil and equities, to piggy back and dive,” he said.

“If you combine that with the sheer volume of those positions, plus the possible glitch and images on TV of protests in Greece, you have non-stop short-selling.”

The Japanese yen is the world’s most widely used currency for funding carry trades. In these transactions, investors borrow in Japanese yen to fund purchases, or trades in other higher yielding and often riskier assets, such as oil and stocks.

As carry trades grew in popularity, the correlation between moves in the Japanese yen and equities and oil prices also increased. The euro/yen pair is now considered by most traders a key indicator of risk appetite or risk aversion in markets.

On Thursday afternoon in New York, the yen was already up against most other major currencies, indicating lower risk tolerance. But gains versus the U.S. dollar started to accelerate around 1:15 p.m. (1615 GMT), followed by a spike against the euro, according to Reuters data.

One hour later — as the plunge in stocks escalated — the greenback was having its worst single-day against the yen since 1998, down more than 4 percent. The euro fell more than 6 percent. Later, both the dollar and euro pared some of their sharp declines against the yen.

On Friday, the dollar rose 0.8 percent against the yen JPY=EBS to 91.27, rallying from five-month lows at 87.95 yen hit on Thursday afternoon, according to EBS trading platform.

The euro recovered to trade 1.3 percent higher versus the Japanese currency at 115.97. On Thursday, it hit a record low of 110.49 EURJPY=EBS, according to EBS.

“When markets want to express a view in large size they do it first in the currency markets,” said Schlossberg.

“Sudden spikes in yen volatility is something people have to pay very close attention to these days,” he said.

At its lowest point on Thursday, the Dow Jones industrial average .DJI plunged 998.5 points -- the biggest ever intraday point loss -- or a fall of about 9.2 percent before recovering some ground.

The index of 30 leading stocks ended down 3.2 percent on the day at 10,520.32, with their combined market capitalization falling $123.5 billion. See FACTBOX [ID:nN06269796]. (Editing by Padraic Cassidy)

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