Is This The End of the Yen Carry Trade? | Forex Factory

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Is This The End of the Yen Carry Trade?

  • #1
  • First Post: Jul 26, 2007 9:16am Jul 26, 2007 9:16am
Over the past week just about every major currency has taken a dive against the Yen. The first was the U.S Dollar, followed by the Canadian Dollar, Swiss Franc, and the Euro. Today the strongest currencies for the carry trade the British Pound, Australian Dollar, and New Zealand dollar have all seen significant declines. Granted we've seen dips in all these currencies in late Feburary and early March when the first news about the U.S. sub-prime mortgage problems began to emerge. But with further negative news about the U.S. housing market and a corresponding decline in liquidity in the bond markets are U.S. hedge funds and other major players beginning to unwind their carry trades?
  • #2
  • Jul 26, 2007 1:55pm Jul 26, 2007 1:55pm
I'm not sure how you equate the US housing market woes to non-USD (cross) currency pairs. This pullback isn't any worse than the last few that have occured. This will be about the 5th time in recent history that fools have rushed in and declared the carry trade over. Sooner or later some idiot will get it right and he'll be hailed as the next trading genius. It's a risk free prediction without any downside.
  • #3
  • Jul 26, 2007 5:18pm Jul 26, 2007 5:18pm
Quoting philmcgrew
I'm not sure how you equate the US housing market woes to non-USD (cross) currency pairs. This pullback isn't any worse than the last few that have occured. This will be about the 5th time in recent history that fools have rushed in and declared the carry trade over. Sooner or later some idiot will get it right and he'll be hailed as the next trading genius. It's a risk free prediction without any downside.
We really don't know how many non-U.S. banks and hedge funds brought either sub-prime mortgage backed securities or deriviatives. That's one of the consequences of globilization. Capital flows across borders much more freely than any time in history.

The initial pullback on this sell-off seems a little bit more violent than the corrections we saw in late Feburary of this year and in October of 2006.

The bottom line is it's still too early in the game to tell if this is a just a bump in the road or a major change in direction.
  • #4
  • Jul 26, 2007 5:47pm Jul 26, 2007 5:47pm
i bet you a 500 pips that this will be the e-n-d of the carry trades for USD at at least.

NZD and GBP is likely to continue, not to mention euro. those country still fighting inflation, thus they expect rates to hold or at least increase
100% of traders are losers. Just that some win more than they lose!
  • #5
  • Jul 26, 2007 6:02pm Jul 26, 2007 6:02pm
Quoting Mr demark
i bet you a 500 pips that this will be the e-n-d of the carry trades for USD at at least.
Good news! You don't have to bet us...put your money in the market. Someone always takes the other side.
  • #6
  • Jul 26, 2007 6:26pm Jul 26, 2007 6:26pm
Quoting philmcgrew
Good news! You don't have to bet us...put your money in the market. Someone always takes the other side.
LOL. Yeah right
100% of traders are losers. Just that some win more than they lose!
  • #7
  • Jul 26, 2007 8:07pm Jul 26, 2007 8:07pm
Here is a reason why the Carry Trade will not die.

Interest Rate Differentials.

Risk appetite will kick back in eventually, just have to ride it out and not try to push it.
  • #8
  • Jul 26, 2007 11:26pm Jul 26, 2007 11:26pm
Quoting Mr demark
i bet you a 500 pips that this will be the e-n-d of the carry trades for USD at at least.

NZD and GBP is likely to continue, not to mention euro. those country still fighting inflation, thus they expect rates to hold or at least increase
You have a point; the 10-year bond sunk like a stone today, while the other engine of the USD/JPY carry trade - the DJIA - seems to have stalled (to put it politely). Something to watch is the SPDR's on the Shanghai (GXC); it took a real beating (down over 4%) while the underlying (Shanghai A-Shares) have been booming, as usual. It's very curious; it usually gets whipped when money is pulled out of the Dow (but not as badly as today) and then rebounds much faster than the Dow, so it should be interesting over the next few days....
  • #9
  • Jul 27, 2007 7:01am Jul 27, 2007 7:01am
Quoting Mr demark
i bet you a 500 pips that this will be the e-n-d of the carry trades for USD at at least.

NZD and GBP is likely to continue, not to mention euro. those country still fighting inflation, thus they expect rates to hold or at least increase
When you go long GBP/JPY and NZD/JPY (really any major against the yen) aren't you effective at the same time going long USD/JPY? So to me the only time you are going to see a change of direction here is if there is a fundamental reason to like the Yen to the point taking the interest rate hit.
  • #10
  • Jul 27, 2007 7:12am Jul 27, 2007 7:12am
when you go long the GBPJPY you are borrowing Yen to buy Pounds. The USD has very little to do with that. I know it sounds crazy to some but there are actually currency transacations that don't involve the USD.
  • #11
  • Jul 27, 2007 7:15am Jul 27, 2007 7:15am
Carry trades can and will exist to some degree as long as there are interest rate differentials. What makes more sense than to borrow cheap money when using it to invest/purchase for the future.

That being said, wait till the rout is over, wait a little, and get set for another run up. Have fun! In the mean time, short the heck out of things. I love this kind of market. Fortunes are made (and lost) during days like we're having here.

Have fun!

GirlFlyer
  • #12
  • Jul 28, 2007 7:57am Jul 28, 2007 7:57am
Quoting philmcgrew
when you go long the GBPJPY you are borrowing Yen to buy Pounds. The USD has very little to do with that. I know it sounds crazy to some but there are actually currency transacations that don't involve the USD.

I believe it actually involves in money flow:

Buy GBP/JPY - Buy GBP/JPY, Sell USD/JPY and it appears up on a chart as GBP/JPY. There is a reason that the Dollar is considered the world's currency.

However, to be honest, on this particular pair, I do not know for sure.

This is the reason you can create synthetic crosses. I have recently read the way money actually flows, and it pretty much always involves the dollar somewhere, even though you don't necessarily see it.

After reading the article, I decided that I should just focus on the chart at hand, and that it was too much thinking, and not enough pips.
  • #13
  • Jul 28, 2007 8:01am Jul 28, 2007 8:01am
Quoting GirlFlyer
Carry trades can and will exist to some degree as long as there are interest rate differentials. What makes more sense than to borrow cheap money when using it to invest/purchase for the future.

That being said, wait till the rout is over, wait a little, and get set for another run up. Have fun! In the mean time, short the heck out of things. I love this kind of market. Fortunes are made (and lost) during days like we're having here.

Have fun!

GirlFlyer
I have to say I agree with her. They will always exist to some degree, but probably not to the levels we are seeing in the last few years.

Also, keep in mind that history does repeat itself, and these Japanese investors will remember this time fondly. So let's pretend it is dead for a while. For a few years even.

As long as the interest rates are wide enough to drive a truck through, there will always be potential to make money in the carry trade. And there is always potential to return to it as well.

Am I calling for a reversal back into the uptrend? No. But I am keeping an eye out on it.
  • #14
  • Jul 28, 2007 8:09am Jul 28, 2007 8:09am
Quoting clockwork71
This is the reason you can create synthetic crosses. I have recently read the way money actually flows, and it pretty much always involves the dollar somewhere, even though you don't necessarily see it.
Correct. A GBP/JPY long is an implicit GPB/USD long and therefore a USD short (along with a JPY short of course). That's partially why USD/JPY wasn't as affected yesterday as the rest of the carry pairs were. As all those other pairs were unwound (A/J, E/J, G/J, N/J, C/J), the base currencies fell against the dollar substantially, neutralizing the effect of the strengthened yen against the USD/JPY pair.
  • #15
  • Jul 28, 2007 8:55am Jul 28, 2007 8:55am
Quoting Trader KGB
Correct. A GBP/JPY long is an implicit GPB/USD long and therefore a USD short (along with a JPY short of course). That's partially why USD/JPY wasn't as affected yesterday as the rest of the carry pairs were. As all those other pairs were unwound (A/J, E/J, G/J, N/J, C/J), the base currencies fell against the dollar substantially, neutralizing the effect of the strengthened yen against the USD/JPY pair.
A synthetically created GBPJPY is a long GBPUSD and a long USDJPY. The USD cancels out (think of the pairs like fractions [GBP divided by USD] multiplied by [USD divided by JPY]) and you are left with the GBPJPY. Buying or unwinding does involve the USD but it involves buying and selling with little net effect.

The USDJPY fell over 300 pips this week. That hardly seems "neutralized" to me.
  • #16
  • Jul 29, 2007 6:40am Jul 29, 2007 6:40am
Quoting philmcgrew
A synthetically created GBPJPY is a long GBPUSD and a long USDJPY. The USD cancels out (think of the pairs like fractions [GBP divided by USD] multiplied by [USD divided by JPY]) and you are left with the GBPJPY. Buying or unwinding does involve the USD but it involves buying and selling with little net effect.

The USDJPY fell over 300 pips this week. That hardly seems "neutralized" to me.

I believe he was speaking in relation to the other JPY crosses. NZD/JPY was 800, for example.
  • #17
  • Jul 29, 2007 9:21pm Jul 29, 2007 9:21pm
Quoting GirlFlyer
Carry trades can and will exist to some degree as long as there are interest rate differentials. What makes more sense than to borrow cheap money when using it to invest/purchase for the future.

That being said, wait till the rout is over, wait a little, and get set for another run up. Have fun! In the mean time, short the heck out of things. I love this kind of market. Fortunes are made (and lost) during days like we're having here.

Have fun!

GirlFlyer
You make an excellent point, when people are panicking, from a speculators standpoint it's the best time to make money.
  • #18
  • Jul 29, 2007 10:25pm Jul 29, 2007 10:25pm
Quoting philmcgrew
A synthetically created GBPJPY is a long GBPUSD and a long USDJPY. The USD cancels out (think of the pairs like fractions [GBP divided by USD] multiplied by [USD divided by JPY]) and you are left with the GBPJPY. Buying or unwinding does involve the USD but it involves buying and selling with little net effect.

The USDJPY fell over 300 pips this week. That hardly seems "neutralized" to me.
Actually the simple answer is that the rate increase profile of the US is far less bullish, and has been for some time now, than that of the BoE, RBA and RBNZ. So you could make the case that the 300 pip drop in USD/JPY is just as significant as the 500 pip drop in AUD/JPY, NZD/JPY, etc. because of the vastly different rate profiles. Imvho I see that all the aforementioned pairs still have ample room to drop, whether they actually do is another thing.
Patience + Humility + Study = Success
  • #19
  • Jul 30, 2007 1:07am Jul 30, 2007 1:07am
Quoting ce_me_flow
You make an excellent point, when people are panicking, from a speculators standpoint it's the best time to make money.
...and lose money as well....although it's the regular naive stock investor who'd lose, if all of it.....and by the way if the carry trade is unwinding, then there is a higher chance for the BOJ to intervene and cut that drop short....they have enough resources to do that and certainly don't want to see and further yen strengthening...we should watch out for surprises....BoJ is unlikely to raise rates in August...it was their goal....to get people take their profits from oversees and spend it in Japan....well...it's happening now ..
  • #20
  • Jul 30, 2007 7:49am Jul 30, 2007 7:49am
Quoting DutchTrader
Actually the simple answer is that the rate increase profile of the US is far less bullish, and has been for some time now, than that of the BoE, RBA and RBNZ. So you could make the case that the 300 pip drop in USD/JPY is just as significant as the 500 pip drop in AUD/JPY, NZD/JPY, etc. because of the vastly different rate profiles.
If countries outside of the US have more optimistic rate differentials why would they drop twice as much as the USDJPY?
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