Morgan Stanley: Yen trends suggest that the euro could become the main arbitrage financing currency

On 3 August, Morgan Stanley indicated that further Japanese yen intervention risks could lead investors to opt for the euro and the Swiss franc instead of using the Japanese yen as a financial currency for arbitrage transactions. “If the risk of intervention continues to make investors more cautious in the short term, it is likely that they will abandon their use of Japanese yen financing and seek new financing currencies,” wrote the strategists David Adams, Andrew Watrous and Molly Nickolin, among others. “The interference of the Japanese authorities in the Japanese yen exchange rate means that the euro and the Swiss franc could become the new `preferred financing currency'”, they say, “the euro may be more popular in view of the risk that the sale of the Swiss franc may run the risk of a sudden rise in risk-averse demand as a result of geopolitical tensions. “The strategists claim that, because of the attractiveness of the spreads and the vulnerability of the yen to soaring energy prices, trading in multi-dollars/Yen had been popular。