4 replies to this topic

[89S10]

Yesterday the yen rose one percent against the U.S. dollar on stronger than expected economic growth in Japan. When people say we have a "liquidity driven" market, they are often referring to the yen carry trade as a source of cheap money. Short term rates in Japan are about 0.5%. So some investors borrow yen and then invest the proceeds in non-yen assets. These players are leveraged 10-to-1 and are often long U.S. bonds, although some crazies buy U.S. and even emerging market stocks with the cheap money. The problem is, if the yen rises, it becomes more expensive to pay back the loan. The 10-to-1 crowd just lost about 9% of their equity on yesterday's rise in the yen. If yen strength continues, it could cause a major source of liquidity to dry up and a wave of selling of risky assets as leveraged investors unwind their carry trades. For the chartists amongst you, check out the daily yen chart against the VIX and the S&P last year, with an emphasis on the second and third quarters. I'd like to hear what you think.

[Tor]

could be. Yen is undervalued by up to 40%. What about gold as a safe haven?

[fib_1618]

What about gold as a safe haven?

If you're talking about gold, as priced in Japanese Yen, the answer is yes.

Fib

http://stockcharts.com/c-sc/sc?s=$GOLD:$XJY&p=D&st=2004-08-01&i=t05184582671&r=7581.png

[briarberry]

some more info from the Economist if anyone is interested...


Feb 8th 2007 - From The Economist print edition

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.

The Bank of Japan (BoJ) bowed to government pressure and held rates unchanged at 0.25% in January. But figures due on February 15th, which are expected to show that GDP grew at an annual rate of 3.5-4% in the three months to December, could give the bank the green light to raise rates at its next meeting.

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.

http://www.economist...tory_id=8679006

http://stockcharts.com/charts/gallery.html?$XJY



GDP data showed that Japan's economy in the October-December quarter expanded at an annualised pace of 4.8 percent, beating market expectations for growth of 3.8 percent.

http://www.businessw...s/D8NA39FG0.htm

Edited by briarberry, 16 February 2007 - 09:14 AM.

[Data]

The franc has been under pressure for months together with the yen as investors use the low-yielding currencies to fund investments in higher-yielding currencies.

At the weekend meeting of the Group of Seven industrial nations, the group's finance ministers and central bankers sent a warning to markets.

"We want the markets to be aware of the risks of one-way bets, in particular on the foreign exchange market," European Central Bank President Jean-Claude Trichet said, adding he was not talking only about yen-based carry trades.

"One-way bets in the present circumstances would not be, it seems to us, appropriate. We want the markets to be aware of the risks they contain," Trichet said.

Switzerland's short-term benchmark interest rate of 2.00 percent is among the lowest in the world, making the franc an ideal currency to fund carry trades.

http://asia.news.yah...12/3/2xcfh.html