Saturday, February 10, 2007

Carry on living dangerously / economist on the carry trade

how long can this "magic roundabout" go on ?

to be fair one should not forget that lots of data from japan like public debt vs gdp is ugly:
"Japan's national debt has increased rapidly since 1993 to more than 170% of GDP" that´s the worst ratio from all bigger countries.

you just need to watch the swiss franc (with great fundamentals) to see that this data cannot explain the ongoing weakness in the yen. the swiss franc is another source of the trade and it looks like the carry trade is spreading . just watch the latest desperate attempt to create a trade in yuan/rupee http://wallstreetexaminer.com/blogs/winter/?p=398. the race goes on and on.........

also from russ: Speculators in the International Monetary Market, a division of the Chicago Mercantile Exchange that deals with trading in currency and interest rate futures and options, held $42.3-billion (U.S.) worth of long U.S.-dollar trades (or bets that the dollar will rise) financed by lower yielding currencies such as the Japanese yen, the Swiss franc and the Canadian dollar,

wie lange kann dieses magische spiel weitergehen?

ehrlicherweise muß man sagen das einige japan fundamentals wirklich grottenschlcht sind (s.oben) diese können aber die entwicklung des yen nicht erklären. dem schweizer franken (einer weiteren carry quelle) geht es ähnlich. und die fundamentals der schweiz sind wohl als solide zu bezeichnen. und die idee des carry trades breitet sich immer weiter aus.

der letzte (verzweifelte?) versuch lautet: verschulden in yuan und kaufen der indischen rupie. und so weiter....

Speculators and low interest rates have helped cheapen the yen, putting the world economy at risk



THE yen is perhaps the world's most undervalued currency. It is even cheaper than the Chinese yuan by some measures. Last week the Japanese currency hit an all-time low against the euro and its real trade-weighted value fell to its lowest since at least 1970, according to an index tracked by JPMorgan. But do not expect the G7 finance ministers and central bankers meeting in Essen, Germany, on February 9th and 10th to spend much time discussing the yen, let alone to do anything to support it.


American and European policymakers do not see eye to eye on the yen. The Europeans would like some action to push up the currency, which, they say, is not bearing its fair share of the dollar's decline. Our latest update of The Economist's
Big Mac index suggests that the yen is a massive 40% undervalued against the euro. .....

American nor the Japanese government thinks there is a problem. Hank Paulson, America's treasury secretary, says he is not worried about the yen's weakness because it is market-driven and reflects economic fundamentals—namely low interest rates and a fragile economy. ....(what do you expect from a former ceo of goldman (no critisism) ? was soll man auch anderes von dem ehemaligen goldman ceo erwarten, soll keine kritik sein)

Mr Paulson is being short-sighted. Even if Japan is not intervening to hold down its currency, the yen is still misaligned. A country with one of the world's largest current-account surpluses and low inflation (but no longer deflation) should have a much stronger currency. Japan's economy is no longer flat on its back. Last year it grew by an estimated 2.3%, and it is forecast to maintain a similar pace this year. As a result, Japan does not need such low interest rates or a super-cheap currency any more. Indeed, Japan's abnormally low rates could be viewed as a form of intervention to hold down the yen.

The Bank of Japan (BoJ) bowed to government pressure and held rates unchanged at 0.25% in January.
( no wonder gold in yen is flying high...../kein wunder das gold in yen abgeht)


The yen has been pushed down in recent months by the highly profitable “carry trade”. At its simplest this involves borrowing in yen at very low interest rates to buy higher-yielding assets, such as American or Australian bonds, or even emerging-market debt that offers a still more lucrative interest margin. Carry trades weaken the Japanese currency, because investors sell the borrowed yen to convert them into other currencies.

Carry trades make sense only if the investor assumes that the yen will remain weak. If it appreciated, this would increase the repayment cost of yen-borrowing and offset the interest differential. But such an assumption is dangerous when the yen is already so undervalued. In theory, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency, here the yen, to rise against the high-interest-rate one.

But the carry trade turns this logic upside down by causing the yen to fall, not rise. This, in turn, lures more investors into the same strategy, amplifying the distortion. Mr Paulson may be revealing more than he intends when he says the yen is “market-driven”: the market is chasing its own tail in defiance of the economic fundamentals.



An elusive number
Nobody really knows how big the carry trade is. ...


...A better clue comes from record net “short” positions in yen futures on the Chicago Mercantile Exchange. Estimates of the total size of the carry trade range as high as $1 trillion

... If markets suddenly become more volatile, hedge funds can very quickly unwind their short yen positions, whereas households are more likely to sit tight. It is the volatile type of trade that central bankers lose sleep over.


The received wisdom in the markets is that yen carry trades will continue as long as the BoJ raises rates only slowly. It would take a rise in Japanese interest rates of at least two percentage points to undermine these trades, and nobody thinks that likely in the next year or so. Furthermore, goes the argument, as long as interest rates stay low, so will the yen.


In fact, the main trigger for an unwinding of carry trades is likely to be not Japanese interest rates, but an upsurge in currency volatility. That is what happened in 1998, when enormous yen carry trades had built up. After Russia's default in August and the subsequent near collapse of Long-Term Capital Management, hedge funds reduced their leveraged positions and the yen started to rise. Then in October the Japanese government announced a plan to recapitalise its crippled banks, which further bolstered the currency, forcing those who had bet against it to cover their positions. The yen jumped by 13% within three days.

Nouriel Roubini, at Roubini Global Economics, says that the lesson of 1998 is that it takes only a small piece of positive news to unravel such trades. Suppose there is suddenly some good news about the Japanese economy at the same time as America's appears to be stalling. An initial rise in the yen could cause today's carry trades to unwind just as rapidly, causing the currency to soar, American interest rates to rise and risk spreads to widen. The volume of yen-related leverage is probably greater now than in 1998. (here is the full dose from roubini / hier die volle dosis roubini http://www.rgemonitor.com/blog/roubini/176117 )

The G7 should be concerned about carry trades not just because they could suddenly unwind and trigger financial turmoil but also because the yen's misalignment is distorting the world economy. The yen carry trade has amplified global liquidity (see
article), further inflating asset-price bubbles across the world. The trade has also prolonged global imbalances by making it easier for countries such as America, Britain and Australia to finance their large current-account deficits.

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