End of the Carry Trade?

I have been watching Bloomberg a lot this week, and have heard several times during this huge carry unwind that certain factors will result in an "involuntary end to the carry trade".

Is this true?

I don't understand what factors (other than a huge BOJ interest rate increase) could cause the carry trade to end. Please explain.

If this happens, will the market slow down appreciably? It seems like carry trade activity (both buying and sell-offs) drive the market. Or will other pairs cause market volitilty? I would hate to see the market slow down too much.

If you look at any JPY cross chart you will see that these levels we are at are merely the levels where the initial huge upside rallies started.

Dutch - I tend to agree from an individual trader POV, put the risk introduced is going to kill the interest from many of the institutional investors who were the ones who really pushed it up. Particularly those (like lending companies) that were using Japan as a source of cheap credit, and shouldn't have been borrowing offshore to start with.

Hi,

You are correct about retail, investment and merchant banks borrowing money from Japan at near 0 percent, then lending it as a mortgage to the common people. Or they have been using it to invest in global financial markets.- It has been driving global growth. The trigger- my guess is that is was a change in policy to allow the US$ to weaken creating greater risk of loss due to currency fluctuation.

The carry unwind is so important because of this predicament and if the Yen strengthens then the banks margins get eaten into or if the stock markets fall.

That is why we are seeing the CBs add liquidity to the markets. It is because of the banks closing the loans from Japan and requiring new loans from Europe and the US.

From recent events we can therefore determine that most of these loans are preferably purchased in Europe as the loan rate is lower than other parts of the world. We can also see them reducing risk as margins are now a lot tighter than before. So their profits will be hit.

So that leaves the Yen to strengthen and maintain that strength as the loans will not be purchased again in the near future. Recession or slower global growth is a greater possibility and maybe higher interest rates.

That is maybe the reason for seeing such strong TIC data for the US. (120B$ per month).

What we really need to know is how much China is borrowing from Japan to fund their growth? When will they start pulling their money out?

Just a thought.