View Full Version : Yen rise - THE exogenous event?
I just had the thought on another thread. Some are speculating that the BOJ's decision to raise short-term interest rate is leading to a rise in the yen, and also to impairment of the yen-carry trade. The thought occurred to me that maybe this could be that exogenous event that would unwind many derivative positions and cause what would be akin to a lot of forced short covering? I'm not educated enough in these areas to know how much influence this would have on the world markets, but my suspicion is that it is significant.
thoughts?
i don't think raising rates from 0.25 to 0.5% explains much. japanese rates are still so low that the carry trade makes sense [and money]. the yen was at the bottom of the 110-120 trading range. the real risk to carry-traders is that it moves with any rapidity to the 110 end of the range. that 8% move in the currency, affecting leveraged loans, could wipe out a lot of carry profits and cause a lot of carry losses. i'm not sure what would make that move happen.
BoJ Hawk Warns Against ‘Carry Trade’
By David Pilling in Tokyo (Financial Times)
Published: March 1 2007 00:00 | Last updated: March 1 2007 00:00
One of the most hawkish members of the Bank of Japan’s policy board has pointed to the potential “side-effects” of cheap money, including the so-called “carry trade”, as the main reason for the central bank’s decision to raise interest rates.
In an allusion to market distortions, including recent weakness in the yen, Atsushi Mizuno, considered one of the board’s more hawkish members, said: “If accommodative monetary conditions are kept over the long term, it is highly likely that some side effects will occur.”
The bank’s board last week voted by eight to one to raise rates by 0.25 percentage points to 0.5 per cent in spite of the absence of inflationary pressure. Instead, the bank has hinted at the need to head off the creation of bubbles, such as in the property market or capital investment.
Mr Mizuno referred explicitly to the carry trade, in which people borrow cheaply in yen and invest in higher-yielding assets abroad. He said a depreciating yen could have a global impact by distorting flows of international capital.
However, he said that Wednesday’s sharp fall on the Nikkei, which followed even deeper declines in China and the US, would probably prove temporary.
“Economic fundamentals suggest that this tumble in stock prices will not likely continue,” he said.
The yen fell back against the dollar on Wednesday after surging to a 10-week high on Tuesday. By late afternoon, the yen was at about Y118.40, after strengthening to Y117.50 the day before.
Tuesday’s sudden appreciation raised concern among some investors that the massive carry trade had started to unwind. The Nikkei opened down more than 700 points in morning trading, marking its sharpest fall since the 2001 New York terrorist attacks, but recovered to end down a more modest 500 points, or 2.85 per cent.
A sharp appreciation of the yen could damage Japanese exporters on which much of the current economic recovery depends.
A senior finance ministry official said he thought a sudden reversal of the carry trade was unlikely because institutional investors were hedged against currency swings, while retail investors were less likely to repatriate funds quickly.
On BoJ policy, the official departed from the finance ministry line that there is no need to raise rates in the absence of inflation. He backed Mr Mizuno’s argument, saying: “Rates of 0.5 per cent, or even worse 0.25 per cent or zero, make the market economy a joke. Money must have some price. Otherwise you just have a free flow of money investing in inefficient enterprises.”
Earlier this week Rodrigo Rato, the managing director of the International Monetary Fund, pointed to the contradiction between Japan’s need to keep monetary policy loose to support the domestic economy and the role of low rates in fuelling the carry trade.
Sapiens
03-01-07, 07:39 AM
On BoJ policy, the official departed from the finance ministry line that there is no need to raise rates in the absence of inflation. He backed Mr Mizuno’s argument, saying: “Rates of 0.5 per cent, or even worse 0.25 per cent or zero, make the market economy a joke. Money must have some price. Otherwise you just have a free flow of money investing in inefficient enterprises.”
See below:
http://www.financial-planning.com/pubs/fp/20060701015.html
We Are the World
Does the current inversion in the U.S. yield curve spell trouble ahead? These days, it's the global yield curve that matters.
Yen rises big time today and the US stock markets are all negative. Seems like a pretty tidy short-term correlation (maybe i'm oversimplifying but just putting 2 and 2 together here)
Another thing to keep in mind: April is the beginning of the Japanese fiscal year.
Historically April and May are the months where Japanese companies repatriate foreign earnings. This is not strong enough normally to change trends, but this year it may have an undue effect.
clue, i've got a gut feeling.
The strength of the stock markets have been on the backs of strong corporate earnings. There are already signs that earnings are going to be going down. The yen rise with I'm betting mostly lowered 1st quarter earnings reports will be the beginnings of the decline in the fundamentals (as earnings will start going down with the meltdowns in RE-based industries).
There is a possibility the stock markets will go up this week with jobs report last week decent along with the fact that I think there are a lot of put options set to expire this friday, and the MM's will work to make sure those put options don't get exercises (IOW an artificial raising of the stock markets due to too many short positions).
vBulletin® v3.7.0, Copyright ©2000-2009, Jelsoft Enterprises Ltd.