Retail investors are often looked on as the unsophisticated types who move slowly and late and rarely have a short-term affect on financial markets. They broke from that mold in Japan, where retail FX traders (known as Mrs. Watanabe) contributed to a surge in the Japanese yen this week when they began to unwind a popular strategy called the carry trade. Many of these investors had shorted the yen and gone long currencies that offer higher yields (the so-called carry trade). Concerned about the effects of the horrible earthquake in Japan on its economy, these investors unwound these trades – meaning they bought the yen en masse and sold the other side of the trade, often the Australian dollar.
Is it possible that the retail investor could move the currency of the world’s third-largest economy this way? Sure thing, because Japanese retail trading of the yen can account for nearly 30% of all trading on any given day.
The result – a big spike in the value of the yen. So, the Bank of Japan reached out to other central banks fora little help in keeping the yen in check. And those banks agreed to do so. Already today, central banks in England, France and Germany have intervened in the markets.
