DislikedIf countries outside of the US have more optimistic rate differentials why would they drop twice as much as the USDJPY?Ignored
- #22
- Jul 30, 2007 8:41am Jul 30, 2007 8:41am
- | Joined Mar 2007 | Status: Fundamentally Technical | 4,446 Posts
Patience + Humility + Study = Success
- #23
- Jul 30, 2007 8:51am Jul 30, 2007 8:51am
- Joined May 2005 | Status: I am not your bro | 1,302 Posts
- #25
- Jul 30, 2007 9:02am Jul 30, 2007 9:02am
- | Joined Mar 2007 | Status: Fundamentally Technical | 4,446 Posts
Patience + Humility + Study = Success
- #26
- Jul 30, 2007 9:03am Jul 30, 2007 9:03am
- | Joined Mar 2007 | Status: Fundamentally Technical | 4,446 Posts
Patience + Humility + Study = Success
- #27
- Jul 30, 2007 9:27am Jul 30, 2007 9:27am
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.
- Pip for pip, the difference between this sell-off and its March counterpart is not really that huge. The major fundamental difference being that the USD suffered more this time because the catalyst came from the US housing market as opposed to Chinese equity markets.
- The possibility does exist that you're not the only trader that has been lulled into the belief that this is only a temporary setback, so there could be quite a few carry trade longs that are hesitant to eject. As you pointed out, the "end of the carry trade" people have cried wolf so many times that fewer and fewer traders believe their doom & gloom prophecies. However, they will be right one of these days so it's important to keep an eye on them.
- The Possibility also exists that this time things could drag on for longer because of that false sense of security (this is related to #2 above), and the whole thing could snowball into something much bigger. It's unlikely at this point, as the bruised up equity markets seem to be recovering, but the fear is certainly still there, so the slightest trigger could get the ball moving again.
The way the carry trade unwind is supposed to happen in theory is "gradually", and central banks will try their best to keep the end from coming suddenly but with so much speculative activity going on these days, this may be easier said than done. In my view, the only way for it to happen gradually is if the Bank of Japan raises rates gradually, thereby gradually diminishing the appeal of the yen carry trade. If the carry trade "fully unwinds" for any other reason, I suggest we all repent and prepare for the end (and of course short the high-yielding currencies 
).
- #28
- Jul 30, 2007 9:39am Jul 30, 2007 9:39am
- Joined May 2005 | Status: I am not your bro | 1,302 Posts
- #29
- Jul 30, 2007 9:43am Jul 30, 2007 9:43am
- | Joined Mar 2007 | Status: Fundamentally Technical | 4,446 Posts
Patience + Humility + Study = Success
- #30
- Jul 30, 2007 9:45am Jul 30, 2007 9:45am
- Joined May 2005 | Status: I am not your bro | 1,302 Posts
- #31
- Jul 30, 2007 9:53am Jul 30, 2007 9:53am
- | Joined Mar 2007 | Status: Fundamentally Technical | 4,446 Posts
Patience + Humility + Study = Success
- #32
- Jul 30, 2007 10:08am Jul 30, 2007 10:08am
- Joined May 2005 | Status: I am not your bro | 1,302 Posts
- #33
- Jul 30, 2007 1:43pm Jul 30, 2007 1:43pm
First off I would just like to mention that GBP/JPY certainly does have an effect on USD/JPY. Say you are long GBP/JPY. Because the trade is made up of 2 separate trades (GBP/USD and USD/JPY) technically you are trading USD, but that's not the point. The USD/JPY long and the GBP/USD long mostly cancel the effect the trade would have on USD (because you are long AND short USD by the same amount) the effect is felt by JPY as it is being sold as well as GBP as it is being bought. GBP/USD would be seen moving higher due to GBP buying and USD/JPY would be seen moving higher due to JPY selling since you are in effect long both GBP/USD and USD/JPY.
OK, some of this information is a bit basic, so I apologize if you are already familiar with it. When a leveraged trader opens a position through their forex broker, what they are doing in effect is using margin as "collateral" in order to borrow the quote currency and use it to buy the specified amount of the base currency. In the case of USD/JPY, you are borrowing JPY and using it to buy USD. Since you can borrow JPY at a ridiculously low rate and in turn collect significantly higher interest on USD, there is significant incentive for you to do so, particularly during times of low market volatility because the chances of huge currency fluctuations against your position are unlikely. You are also part of a huge group of other like-minded traders in search of something certain in a very uncertain occupation - daily interest.
Since you are not alone in your quest for a high yield, a lot of other traders jump on the same opporunity and buy USD/JPY, turning it into somewhat of a self-fulfilling prophecy. Now you are no longer earning just the interest while managing to stay afloat because of low volatility: you are actually earning more from the currency movements than from the interest itself, although the interest is a nice little bonus. There are also other investors who are not only buying the currency and collecting the interest, but are buying USD-denominated assets which are earning them even more because the US economy is growing at a strong pace and just about any asset is likely to appreciate in value. All is good in the universe.
BUT then... a section of this invincible economy cracks and sends ripples of uncertainty across the seven seas. China, the hot new kid on the block is growing at a blistering pace, but mostly because of overseas (US), demand for its exports. What if the US consumer gets weaker? China doesn't yet have a middle class of domestic consumers that could sustain its economic boom. Japan, the world's 2nd largest economy has been struggling for a decade and also relies heavily on US demand for its exports since the domestic consumer is weak and showing little sign of recovery. Russia, another strong emerging economy, bases its strength on natural resources (energy). But if China, the world's factory, reduces factory output because of waning demand, its demand for energy will slow as well. The price of oil drops, or at least cools down, making new oil exploration ventures less feasible and cutting off funding for related R&D. Russia, as well as most energy companies around the world suffer. In fact all commodity currencies suffer, just because the American consumer MAY be weakening (we haven't really seen this yet) and can no longer afford the "Made in China from imported materials" product. The universe has been thrown out of alignment.
What do you, the smart investor, do? You are going to sell your assets in the US, China, Russia and Australia while they are still worth something. Every other investor will do the same. All those smart investors that borrowed dirt cheap JPY to buy assets in higher-yielding currencies are now panic-selling those assets and converting their MXNs, RUBs, CNY, AUDs, NZDs and of course USDs back to JPYs again as their yield advantage becomes overshadowed by price fluctuation. Market volatility rears its ugly head as world stock markets crash. All the king's horses and all the king's men can't put them back together again. Demand for the low-yielding JPY surges as years of accumulated shorts are now buying back the currency and are willing to pay any price for it. JPY value goes through the roof against every currency known to man. No one is borrowing it anymore to fund overseas assets because all those overseas assets are losing value. The market volatility no longer makes it worth your while to collect overnight interest (i.e peanuts) since the currency markets and stock markets are trending against you and can wipe out your leveraged account in the blink of an eye. Bond prices are also rising and yields dwindling as the flight to quality (or risk aversion) drives some investors to seek shelter in these markets. No! What the smart investor does at that point is go with the trend and SHORT the carry trade. Never mind the 2 pips you pay in overnight interest when you can make 500 pips off that sick trend. This only compounds the troubles as the carry trade is not only being unwound but is also under attack from huge amounts of speculative flows - actual shorts riding the wave of re-patriation.
Liquidity is low. Credit is virtually impossible to get. No one even remembers what M&A means. Earnings season? Don't know what you're talking about.
etc, etc...
In any case, I'm sure you get the picture. I purposely didn't mention EUR and GBP because they have shown some resilience with respect to the situation in the US, but rest assured that if the above scenario pans out, EUR/JPY and GBP/JPY won't miss the ride completely. Look at your charts if you don't believe my story.
If you say that the USD has suffered because of this, and I agree that it has been impacted, then where does the money go? If you move money from US stocks to US bonds that is still in USD. To make the USD go down the money has to flow into another denomination. How can a decline in the USD cause a drop in the GBPJPY for example? Do investors now believe that Japan is the next hot economy? I think we fell for that one in the 80s.
Since you are not alone in your quest for a high yield, a lot of other traders jump on the same opporunity and buy USD/JPY, turning it into somewhat of a self-fulfilling prophecy. Now you are no longer earning just the interest while managing to stay afloat because of low volatility: you are actually earning more from the currency movements than from the interest itself, although the interest is a nice little bonus. There are also other investors who are not only buying the currency and collecting the interest, but are buying USD-denominated assets which are earning them even more because the US economy is growing at a strong pace and just about any asset is likely to appreciate in value. All is good in the universe.
BUT then... a section of this invincible economy cracks and sends ripples of uncertainty across the seven seas. China, the hot new kid on the block is growing at a blistering pace, but mostly because of overseas (US), demand for its exports. What if the US consumer gets weaker? China doesn't yet have a middle class of domestic consumers that could sustain its economic boom. Japan, the world's 2nd largest economy has been struggling for a decade and also relies heavily on US demand for its exports since the domestic consumer is weak and showing little sign of recovery. Russia, another strong emerging economy, bases its strength on natural resources (energy). But if China, the world's factory, reduces factory output because of waning demand, its demand for energy will slow as well. The price of oil drops, or at least cools down, making new oil exploration ventures less feasible and cutting off funding for related R&D. Russia, as well as most energy companies around the world suffer. In fact all commodity currencies suffer, just because the American consumer MAY be weakening (we haven't really seen this yet) and can no longer afford the "Made in China from imported materials" product. The universe has been thrown out of alignment.
What do you, the smart investor, do? You are going to sell your assets in the US, China, Russia and Australia while they are still worth something. Every other investor will do the same. All those smart investors that borrowed dirt cheap JPY to buy assets in higher-yielding currencies are now panic-selling those assets and converting their MXNs, RUBs, CNY, AUDs, NZDs and of course USDs back to JPYs again as their yield advantage becomes overshadowed by price fluctuation. Market volatility rears its ugly head as world stock markets crash. All the king's horses and all the king's men can't put them back together again. Demand for the low-yielding JPY surges as years of accumulated shorts are now buying back the currency and are willing to pay any price for it. JPY value goes through the roof against every currency known to man. No one is borrowing it anymore to fund overseas assets because all those overseas assets are losing value. The market volatility no longer makes it worth your while to collect overnight interest (i.e peanuts) since the currency markets and stock markets are trending against you and can wipe out your leveraged account in the blink of an eye. Bond prices are also rising and yields dwindling as the flight to quality (or risk aversion) drives some investors to seek shelter in these markets. No! What the smart investor does at that point is go with the trend and SHORT the carry trade. Never mind the 2 pips you pay in overnight interest when you can make 500 pips off that sick trend. This only compounds the troubles as the carry trade is not only being unwound but is also under attack from huge amounts of speculative flows - actual shorts riding the wave of re-patriation.
Liquidity is low. Credit is virtually impossible to get. No one even remembers what M&A means. Earnings season? Don't know what you're talking about.
etc, etc...
In any case, I'm sure you get the picture. I purposely didn't mention EUR and GBP because they have shown some resilience with respect to the situation in the US, but rest assured that if the above scenario pans out, EUR/JPY and GBP/JPY won't miss the ride completely. Look at your charts if you don't believe my story
.
- #34
- Jul 31, 2007 7:25pm Jul 31, 2007 7:25pm
- | Commercial User | Joined May 2007 | 7,685 Posts
First off I would just like to mention that GBP/JPY certainly does have an effect on USD/JPY. Say you are long GBP/JPY. Because the trade is made up of 2 separate trades (GBP/USD and USD/JPY) technically you are trading USD, but that's not the point. The USD/JPY long and the GBP/USD long mostly cancel the effect the trade would have on USD (because you are long AND short USD by the same amount) the effect is felt by JPY as it is being sold as well as GBP as it is being bought. GBP/USD would be seen moving higher due to GBP buying and USD/JPY would be seen moving higher due to JPY selling since you are in effect long both GBP/USD and USD/JPY.
OK, some of this information is a bit basic, so I apologize if you are already familiar with it. When a leveraged trader opens a position through their forex broker, what they are doing in effect is using margin as "collateral" in order to borrow the quote currency and use it to buy the specified amount of the base currency. In the case of USD/JPY, you are borrowing JPY and using it to buy USD. Since you can borrow JPY at a ridiculously low rate and in turn collect significantly higher interest on USD, there is significant incentive for you to do so, particularly during times of low market volatility because the chances of huge currency fluctuations against your position are unlikely. You are also part of a huge group of other like-minded traders in search of something certain in a very uncertain occupation - daily interest.
Since you are not alone in your quest for a high yield, a lot of other traders jump on the same opporunity and buy USD/JPY, turning it into somewhat of a self-fulfilling prophecy. Now you are no longer earning just the interest while managing to stay afloat because of low volatility: you are actually earning more from the currency movements than from the interest itself, although the interest is a nice little bonus. There are also other investors who are not only buying the currency and collecting the interest, but are buying USD-denominated assets which are earning them even more because the US economy is growing at a strong pace and just about any asset is likely to appreciate in value. All is good in the universe.
BUT then... a section of this invincible economy cracks and sends ripples of uncertainty across the seven seas. China, the hot new kid on the block is growing at a blistering pace, but mostly because of overseas (US), demand for its exports. What if the US consumer gets weaker? China doesn't yet have a middle class of domestic consumers that could sustain its economic boom. Japan, the world's 2nd largest economy has been struggling for a decade and also relies heavily on US demand for its exports since the domestic consumer is weak and showing little sign of recovery. Russia, another strong emerging economy, bases its strength on natural resources (energy). But if China, the world's factory, reduces factory output because of waning demand, its demand for energy will slow as well. The price of oil drops, or at least cools down, making new oil exploration ventures less feasible and cutting off funding for related R&D. Russia, as well as most energy companies around the world suffer. In fact all commodity currencies suffer, just because the American consumer MAY be weakening (we haven't really seen this yet) and can no longer afford the "Made in China from imported materials" product. The universe has been thrown out of alignment.
What do you, the smart investor, do? You are going to sell your assets in the US, China, Russia and Australia while they are still worth something. Every other investor will do the same. All those smart investors that borrowed dirt cheap JPY to buy assets in higher-yielding currencies are now panic-selling those assets and converting their MXNs, RUBs, CNY, AUDs, NZDs and of course USDs back to JPYs again as their yield advantage becomes overshadowed by price fluctuation. Market volatility rears its ugly head as world stock markets crash. All the king's horses and all the king's men can't put them back together again. Demand for the low-yielding JPY surges as years of accumulated shorts are now buying back the currency and are willing to pay any price for it. JPY value goes through the roof against every currency known to man. No one is borrowing it anymore to fund overseas assets because all those overseas assets are losing value. The market volatility no longer makes it worth your while to collect overnight interest (i.e peanuts) since the currency markets and stock markets are trending against you and can wipe out your leveraged account in the blink of an eye. Bond prices are also rising and yields dwindling as the flight to quality (or risk aversion) drives some investors to seek shelter in these markets. No! What the smart investor does at that point is go with the trend and SHORT the carry trade. Never mind the 2 pips you pay in overnight interest when you can make 500 pips off that sick trend. This only compounds the troubles as the carry trade is not only being unwound but is also under attack from huge amounts of speculative flows - actual shorts riding the wave of re-patriation.
Liquidity is low. Credit is virtually impossible to get. No one even remembers what M&A means. Earnings season? Don't know what you're talking about.
etc, etc...
In any case, I'm sure you get the picture. I purposely didn't mention EUR and GBP because they have shown some resilience with respect to the situation in the US, but rest assured that if the above scenario pans out, EUR/JPY and GBP/JPY won't miss the ride completely. Look at your charts if you don't believe my story
Wow, that took some thought. My brain is about to explode.
VERY GOOD post.
- #36
- Aug 8, 2007 12:30pm Aug 8, 2007 12:30pm
- Joined May 2005 | Status: I am not your bro | 1,302 Posts
The DJIA is within 400 points of its all time high. The GBPJPY has climbed over 600 pips in just over a week. Maybe the sky isn't falling after all.
- #38
- Aug 8, 2007 7:50pm Aug 8, 2007 7:50pm
- Joined Jan 2007 | Status: Stochastic pipster | 1,657 Posts
- #39
- Aug 9, 2007 8:26am Aug 9, 2007 8:26am
And thats only 5 years ago and the world has not changed that much, has it ?
.