Friday, February 2, 2007

How Big Is The Yen Carry Trade?

Attention has recently been focused once again on the yen carry trade and its effects on global liquidity and asset inflation. The EU is concerned and wants to step on the brakes, while the US does not. One can only surmise that US investment banks and funds are making a bundle from it.

First a definition: the yen carry trade consists of borrowing yen at near zero interest rates (the Bank of Japan equivalent of the Fed funds rate is at 0.25%) and immediately selling the yen for another currency to invest at higher rates. The low-cost yen loan is "carrying" the high yield investment.

For example, one such trade would be to borrow yen at 0.25%, sell them for dollars in the spot FX market and deposit the dollars at a bank for 5.25%. If the dollar/yen exchange rate does not change at all there will be a net gain of 5.00% in one year - this is called "the carry". In practice, the gains could be much greater because such trades are frequently done on margin and could result in 5 or even 10 times leverage - the gains would be 25% or 50%. Naturally, the high leverage would also mean very high losses if the trade goes against the speculator.

There are three risks: (a) that yen rates go higher, increasing the borrowing cost, (b) that dollar rates go down, decreasing the return and (c) that the yen exchange rate strengthens against the dollar requiring more dollars to repay the yen loan. Nothing prevents any two of the above, or even all three, from occurring at the same time. That would be very damaging to the speculator, of course.

But how much money is out there pursuing such yen carry trades? No one knows for sure, but I think it is somewhere between $1 to $2 trillion and I will explain why.

The easiest, one-step process to put on a carry trade is to do a foreign exchange forward swap. It consists of selling yen for dollars at today's spot exchange rate and agreeing to buy them back on a pre-determined forward date and at a pre-determined exchange rate. I will spare you the math and tell you right away that the difference in the two exchange rates (forward minus spot) translates to the difference between the two interest rates. Such trades are extremely common between banks and other financial institutions and can be put on for anything from one day to one year.

Once again we turn to our trusty Bank of International Sttlements (BIS) for data. As of the end of June 2006 there were the equivalent of $3.8 trillion in such yen forward swaps vs. $2.3 trillion just five years earlier. For a country with near zero economic growth and zero interest rates for a decade, a 65% jump in FX swaps can only point to very widespread speculation.

Source: BIS


Anonymous said...

runescape money runescape gold tibia item tibia gold runescape accounts tibia money runescape gp buy runescape gold tibia gold tibia item buy runescape money runescape items tibia money

Anonymous said...

tibia money tibia gold tibia item runescape accounts buy runescape accounts runescape money runescape gold runescape gp runescape power leveling runescape powerleveling cheap rs2 powerleveling runescape equipment buy rs equipment runescape runes cheap rs2 runes runescape logs cheap rs2 logs runescape items buy runescape items runescape quest point rs2 quest point cheap runescape questpoint runescape gold runescape items runescape power leveling runescape money runescape gold buy runescape gold buy runescape money runescape items runescape accounts runescape gp runescape accounts runescape money runescape power leveling runescape powerleveling tibia gold dofus kamas buy dofus kamas wow power leveling wow powerleveling runescape questpoint rs2 questpoint Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling Hellgate money Hellgate gold buy runescape logs buy rs2 items cheap runescape items Hellgate London gold Guild Wars Gold buy Guild Wars Gold runescape items rs2 accounts cheap rs2 equipments lotro gold buy lotro gold buy runescape money buy runescape gold buy runescape runes lotro gold buy lotro gold runescape money runescape gold cheap rs2 powerleveling eve isk eve online isk buy runescape power leveling rs2 power leveling tibia gold tibia item runescape accounts Fiesta Silver Fiesta Gold SilkRoad Gold buy SilkRoad Gold Scions of Fate Gold Hellgate Palladium Hellgate London Palladium SOF Gold Age Of Conan Gold AOC Gold ArchLord gold tibia money tibia gold runescape accounts runescape gold cheap rs2 powerleveling buy ArchLord gold DDO Plat Dungeons and Dragons Online Plat

laptop battery said...

In essence, the Fed provided - gratis, I might add - a put option which was immediately exercised by commercial and investment banks in dire straights. What will undoubtedly become known as the Bernanke put,
Camera Battery KLIC-7001 For KODAK EasyShare V550 NEW
KODAK Camera EasyShare V530 KLIC-7002 Battery New
Battery For Klic-7003 Kodak Easyshare V803 V1003
battery for kodak olympus K7004 KLIC-7004
battery for kodak K7005 KLIC-7005
Battery For BN-V101 BNV101 JVC GC-S5 MX-600X

battery for jvc BN-VF815 BN-VF808 N-VF823
Battery for DMW-BM7 CGA-S002 Panasonic Lumix DMC-FZ1

BCB7 S004
Battery For Panasonic Lumix CGA-S005 DMC-FX07 DMC-FX50
CGA-S006 Battery for Panasonic LUMIX DMC FZ30 FZ7 FZ8
CGA-S007 DMW-BCD10 Battery for Panasonic TZ2 TZ3 B42
battery for Sharp BT-L226U VR-BLZ7 VL-Z8U VL-Z900
Brand New Battery Charger For Sharp BTL241/441/221