Yen carry trade

[xpanda]

Anybody got the cliff notes version on how this thing works? And what it has/does/will mean to global markets?

Ta.

 

[DarrylParsons]

From investopedia:

Here's an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

IMO it's better to just play the currency futures market because all that stuff is already factored into the forward pricing.

 

[Willie99]

Come on X, don't disrupt our conversations about Sarah Palin's nipple rings with this kind of thread. :thumbsup:

If you can't tell, I have nothing constructive to bring to this here subject matter.

 

[tiznow]

sell yen short at 0.5% and buy kiwi that has interest rates of 7%

you not only got the high interest rates when shit was going good but also the currency differential in that yen weak and kiwi strong

this worked for everybody and anybody for way too long and the trade got so heavily one sided.....with a ton of leveraged hedge funds all jumping in on that side......

now everything reversing hard and everybody running for the exists

plus based on the action of late

pretty sure there was a decent amount of USD carry trade going on

as every day the yen goes into hyper ramp

the USD is the 2nd strongest currency behind it

 

[DarrylParsons]

To clarify my comment above, whenever two countries' interest rates differ sharply, the currencies are usually expected to change in such a way that there is no advantage to investing in one vs. other. Otherwise it would just be too easy. Of course stuff doesn't always happen as expected, so you can bet on a currency deviating from the expectation. Best way to do that is with futures IMO because the buy-sell spreads are thinner.

 

[xpanda]

Was the carry trade official gov't policy, or just something that prudent investors/traders noticed and took advantage of?

 

[tiznow]

just another unsustainable bubble that hedge funds piled into on top of gobs of leverage and are now getting their clocks cleaned

japan was stuck in deflation and wasn't gonna move interest rates anytime soon

while the global economy was booming a boom which has been seen in a long long time creating inflation and thus interest rate increases over time in many parts of the world

now the inflationary boom fun times are over

and global deflation taking over....and everybody slashing rates....trying to fight it off....

so now everybody piles into the yen in response cause they a nation of savers

 

[xpanda]

So will we see a USD carry trade soon, assuming some other central bank out there actually parts company with FED policy?

(Not gonna be the BofC, that's for sure. Fuckers.)

 

[tiznow]

carry trade itself isn't a problem

the whole problem is all the leverage

leverage in housing, leverage in yen carry trade, leveraged buyout firms that fueled the M&A bubble

the whole problem is somebody with say 2 billion in assets was able to play with 20 billion of assets on leverage everything all fine and dandy while things are going good and they making the right moves and making money

but if shit starts to go sour than theirs 18 billion out there that really doesn't exist in some sense and somebody has to man up to that......a investment bank or whatever

the whole problem is all these hedge funds and leveraged people were all piling into the same side of the trade using money they really didn't have and now that shit going bad everybody can't get out the door all at once to save themselves and there are gonna be gobs of losses and many casualties

we are now in the deleveraging stage which is causing our economy to crumble and deflation to take over as the debt implodes

the days of leverage are over done for no more....that experiment failed badly....