SHORT VIEW- YEN

If you need a measure of how much optimism has returned to world markets, look at the yen. It has dropped below the Y100 to the dollar landmark for the first time since October, and is sharply weaker against the euro.

This follows a period when the yen shot upwards thanks to the unwinding of the “carry trade” – in which investors borrowed in yen at low interest rates and parked in higher yielding currencies. The strong yen that resulted might have had much to do with the subsequent collapse in Japanese exports.

If the yen stays weak, and currency risk can be hedged, Japanese stocks look attractive – the Nikkei 225 is almost level for the year in yen terms, but no much better than other markets in dollar terms.

Why has the yen fallen? In part, it is responding to economic fundamentals. If exports are falling, the currency should be expected to weaken.

Yet the move also looks to be part of the markets' broader surge of optimism in recent weeks. It overlaps with a fall in US equity market volatility, as measured by the CBOE's Vix index, which last week fell below 40 for the first time since the top of the last equity bear market rally, in January, and with a fall in the price of gold.

As of the end of March, US futures traders were net “short” the yen, against the dollar and the euro, for the first time since last August.

Investors almost seem to think they can return to the rules of the game that adhered before the collapse of Lehman Brothers last September.

That would, at best, be wildly premature. The falls for US and European stocks yesterday along with a tick up for the Vix and a bounce back for the yen against the euro once it touched its 200-day moving average – an important technical indicator for traders – all suggest that the market is at least reconsidering whether the optimism has been taken too far.