THE US DOLLAR ISN'T THE ONLY SAFE HAVEN CURRENCY -- THE JAPANESE YEN HAS BEEN EVEN STRONGER DURING JANUARY -- THE YEN IS ALSO TURNING UP RELATIVE TO OTHER GLOBAL CURRENCIES IN UNWINDING OF CARRY TRADE AND MOVE TO SAFETY

YEN IS ALSO A SAFE HAVEN CURRENCY ... Most currency focus has been on the rise in the U.S. Dollar since December. That has not only undermined the commodity rally, but is also siphoning money out of global stocks that had been trending in the opposite direction of the greenback. Chart 1 shows the PowerShares Bullish Dollar ETF (UUP) breaking out to a new four-month high today and nearing a test of its 200-day average. [The cash $USD, on which the UUP is based, has already exceeded its 200-day line]. The dollar isn't the only currency to be rallying on safe haven status. So is the Japanese yen. Chart 2 plots the CurrencyShares Yen ETF (FXY) rallying against the dollar since the start of January. That's when most global stocks and commodities started to weaken. That may be due to unwinding of "carry trades" in both currencies. The carry trade involves borrowing low yielding currencies (selling the dollar and yen short) and reinvesting the money in higher-yielding (and riskier) assets. When those riskier assets start to weaken (as they have during January), global traders sell those pricey assets and buy back dollars and yen. The bigger story may involve the upturn in the yen versus other currencies besides the dollar.

Chart 1

Chart 2

MOVE TO YEN SAFETY... Chart 3 plots the direction of the Euro (red line) and Australian Dollar (blue line) against the Japanese yen over the last decade. It's clear that the yen was a dreadful currency during that period of time. Most of the Euro and Aussie gains came after 2002 when global stocks and commodities started a major upturn (and the U.S. Dollar weakened). A lot of that global strength was financed by borrowing cheap yen. During 2008, however, global assets (including most currencies) collapsed against the yen as the yen carry trade was unwound. Fast forward to Chart 4. Starting in March 2009, higher-yielding assets like the XAD and XEU turned up against the yen as did stocks and commodities. That started to change during October, however. The Aussie/yen (blue line) peaked in October and again in January. The XAD was the strongest currency during 2009 (because of its close ties to commodities and China). It may be starting to roll over. The Euro/yen (red line) peaked in October and has fallen to the lowest level in a year. That may be due more to European weakness than yen strength. But it looks like global investors are turning to the yen (and dollar) as safe havens as the likelihood of a global correction grows.

Chart 3

Chart 4

YEN VERSUS DOLLAR... In case you're wondering whether the yen or dollar is stronger, take a look at Chart 5. It plots the yen versus the dollar over two decades. After bottoming in 1998 (during the Asian currency crisis), the yen remained relatively flat against the dollar for nearly a decade. During 2008 (in the midst of the subprime mortgage crisis), the yen broke out to the highest level against dollar in thirteen years. The yen is still the stronger of the two.

Chart 5