The yen is a weathervane for global funding costs, particularly for market-related speculative leverage, i.e. securities margin. Its ultra-low interest rates have attracted borrowing demand from hedge funds, funds-of-funds and private equity funds from all over the world. At the same time, local Japanese investors have moved out of their own currency in exchange for higher yielding investments abroad. This pushme-pullyou affair that has kept the value of the yen abnormally low vs. the dollar and the euro is, in my opinion, coming to an end.
No one really knows how much money is involved in this strategy, known collectively by the term "yen carry trade". Some put it at a few hundred billion dollars, others think it may involve as much as a trillion or more. Without becoming too esoteric, I think the best picture is provided by the BIS data on yen foreign exchange forward swaps (see chart below, click to enlarge). Bank FX and money market dealers structure their trading books around such swaps and - very importantly - they are considered off-balance sheet items for banks' regulatory and other capital requirements.
This is not to imply that the yen carry trade involves 4 trillion dollars. There are major non-speculative uses for such swaps, namely funding and hedging commercial transactions like imports/exports, project finance, etc. However, notice the sharp jump from $3 trillion to nearly $4 trillion after 2005, precisely when global markets turned frothy and credit for speculative purposes became very abundant. I don't think this is a coincidence and thus, in my opinion, $1 trillion is a fair estimate for the yen carry trade.
Leveraged finance is now unraveling before our very eyes and cheap yen funding is perhaps the very last straw still poking out of the liquidity pond, providing some low-cost breathing air to those speculators now deeply under water. As the yen strengthens vs. the dollar and euro the carry will produce its own margin calls, further pressuring stretched speculative positions - and that will indeed be "the last straw".
P.S. Several hours after I wrote the above dollar-yen went from 116 to 112. Margin calls must be going unmet and the banks are selling out customer positions. This is going to ricochet throughout all markets for quite a while. Cheap funding no more... there goes the straw.
Leveraged finance is now unraveling before our very eyes and cheap yen funding is perhaps the very last straw still poking out of the liquidity pond, providing some low-cost breathing air to those speculators now deeply under water. As the yen strengthens vs. the dollar and euro the carry will produce its own margin calls, further pressuring stretched speculative positions - and that will indeed be "the last straw".
P.S. Several hours after I wrote the above dollar-yen went from 116 to 112. Margin calls must be going unmet and the banks are selling out customer positions. This is going to ricochet throughout all markets for quite a while. Cheap funding no more... there goes the straw.
and that will push the Japanese economy in a very bad situation (GDP was driven by exports). And the swissie should go up as well, even for the moment the swiss currency is not reacting. time will come as well ...and that will be bad for the swiss economy
ReplyDeletemiju
The question isn't just: Do hedge funds use yen carry to make speculative investments?
ReplyDeleteRemember what hedge funds are suppose to do: invest on both the long and short sides of the market to balance risk.
However, the very high inverse correlation (on a daily basis) between yen and global stocks in 2007 has indicated that most yen carry money is being used to go long speculative stocks.
I have been saying that the final straw won't just involve an unwind of yen carry. It also will involve a shift in carried positions away from net long to a more neutral mix (i.e., more shorts). The combination will greatly increase market volatility and loss. If this is so, expect the markets to fall sharply even after the yen stabilizes, as carry positions are increased on the short side.
The yen carry trade for the last year or more has been driven mostly by kimono traders searching for higher yields overseas. They have typically been dip buyers, which removed a lot of volatility from the carry trade. The sharp moves today may just be the Japanese retail investors waking up to the turmoil in the US market.
ReplyDeleteThe Ministry of Finance may start verbal interventions on the Yen if it drops below 107. But, I think traders may drop this as low as 95 before there is a real risk the MOF will intervene. I don't think they want to be seen as currency manipulators with two different curreny bills in Congress. But, if the Yen gets to 95, the US markets will be in tatters and then Congress will be singing a different tune about lending money to the US.
Be interesting to see if the BOJ will have the moxy to boost rates above .5% like they were planning.
I am deeply concerned that we will see a mass insolvency because of the carry unwinding. I've seen this before on a much smaller scale. A 1 trillion variation call will cause mass devistations on balance sheets in the banking system.
ReplyDeletetibia 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
ReplyDeleterunescape money
ReplyDeleterunescape gold
runescape money
runescape gold
buy runescape gold buy runescape money runescape items
runescape accounts
runescape gp
runescape money
runescape power leveling
runescape money
runescape gold
dofus kamas
cheap runescape money
cheap runescape gold
Guild Wars Gold
buy Guild Wars Gold
lotro gold
buy lotro gold
lotro gold
buy lotro gold
lotro gold
buy lotro gold
Hellgate Palladium
Hellgate London Palladium
Hellgate money
Tabula Rasa gold tabula rasa money
Tabula Rasa Credit
Tabula Rasa Credits
Hellgate gold
Hellgate London gold
wow power leveling
wow powerleveling
Warcraft PowerLeveling
Warcraft Power Leveling
World of Warcraft PowerLeveling World of Warcraft Power Leveling runescape power leveling
runescape powerleveling
eve isk
eve online isk
eve isk
eve online isk
tibia gold
Fiesta Silver
Fiesta Gold
Age of Conan Gold
buy Age of Conan Gold
aoc gold
呼吸机
无创呼吸机
家用呼吸机
呼吸机
家用呼吸机
美国呼吸机
篮球培训
篮球培训班
篮球夏令营
china tour
beijing tour
beijing travel
china tour
tibet tour
tibet travel
computer monitoring software
employee monitoring