Yen Carry Trade Players Decapitated
March 3rd, 2007What is the real value of the yen carry trades? Nooooooooooooooobody knows… But if that thing continues to get squeezed, look out.
Via: Times Online:
Hedge funds gambling on highly leveraged bets in the markets driven by the gap between Japan’s low interest rates and higher ones elsewhere may have seen a year’s worth of potential profits wiped out in ten days as the yen has surged.
Investors in the yen “carry trade†have been badly wrong-footed by the leap in the value of the Japanese currency, which rose yesterday to an 11-week high of 117 to the dollar.
“Undoubtedly, there will have been significant pain suffered by a number of players,†Adam Chester, the chief economist in the treasury department of HBOS, said.
Billions of dollars may have been lost by hedge funds and traders who have failed to cap their exposure in any way – although precise estimates are impossible because of wide variations in estimates of the size of the trade.
Hiroshi Watanabe, the leading Japanese financial diplomat, estimated conservatively this week that the carry trade was worth between $80 billion (£41 billion) and $160 billion. On that basis the yen’s steep rally since February 23 would have left carry-trading speculators exposed to potential paper losses of $3.1 billion to $6.2 billion.
Some estimates of the trade go as high as $1 trillion, however, which would magnify these potential losses. Hedge funds and proprietary traders in the big investment banks routinely conduct carry trades, borrowing cheaply in Japan, converting to other currencies and investing the proceeds in higher-yielding securities. Until recently, the rush to conduct yen carry trades has helped to weaken further an already depressed yen, boosting profits in a virtuous circle for hedge funds.
However, analysts say that this virtuous circle is in danger of turning into a vicious one, with hedge funds rushing to unwind their positions, boosting a resurgent yen and triggering further unwinding.
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Amid a nervous climate among speculators who have staked billions on the carry trade, the impact of any negative news for the dollar is being amplified. As any such news pushes the dollar down, and adds to upward pressure on the yen, carry-trade speculators have greater grounds to worry that the rising yen will undermine the profitability of their bets in the markets and are encouraged to unwind these positions. Since that requires them to buy the yen, the currency comes under yet more upward pressure.
Once again Kevin, you have exposed the keys to the game. Borrow cheap money from burst-bubble Japanese economy, build stuff cheap with Chinese slave labor, and sell it to idiot spendthrift Americans by leading them fiat money on their home, their only valuable tangible asset remaining.
http://news.goldseek.com/DailyReckoning/1172779546.php
“So is the whole current global asset boom model in jeopardy? No. There are three pillars to the global asset boom, Japan’s easy money, America’s free-spending ways, and China’s appetite for raw materials in order to make things. If this were a celebrity marriage (with a bride and two grooms, or two brides and a groom, or three brides, or three grooms) what would we call it…Chimerican? Americhinan? Or how about…Japanica!
Japanica it is, the new name for the wobbly, triumvirate/mascot for the global super asset bubble. And for the record, since we’re sure history is paying attention to every word we write, our bet is that this asset bubble has miles and miles to go before it sleeps. The unification of global stock exchanges looms in the not-too-distant future. This will facilitate even more rapid global capital flows…and bring even more investment products on-line for surplus savers, be they in Australia, China, or Amer…er…Japan.”