4 replies to this topic

[flyers&divers]

http://www.financial.../2005/0227.html

F&D

[pedro]

http://www.financial.../2005/0227.html

F&D

If you do, I would welcome some clarity on one particular paragraph, and especially the last sentence, that I believe is central to Fekete's analysis:

<<This is where I take issue with the conventional wisdom .... What they miss is the fact that the bear market in the dollar actually helps rather than hurts the yen carry-trade. The terms of trade for those who sell yens to buy dollars is improved immensely by the fall of the dollar. The yen carry-trade can be described as arbitrage with short leg in the yen bond market and long leg in the dollar bond market. Profits on the long leg increase far more than losses on the short as a result of the dollar-devaluation. >>

I've been reading Antal for years, and he's an original thinker. But I don't follow this. Yes, borrow yen at 1% and go long $ bonds at 4%. But over the holding period you lose on the dollar's depreciation. In theory, under the uncovered interest parity condition, its supposed to be a wash. In reality it isn't.

Yes too, a falling dollar means over time you can buy more and more dollars with your yen borrowings. But for borrowers who short the yen, these ever more 'favorable' terms of trade work the opposite way at the end of the trade. It costs you more and more dollars -- and then some -- to buy those yen back and repay the loans. Assuming you finally do. [Hence I believe, the markets current sensitivity to any perceived threats for a yen rally.]

On the last sentence, its true that as long as US rates stay low or better still, fall further, there are capital gains on the bonds that might over ride the FX losses. Fekete doesn't explain it that way though, so I'm not sure that's what he means.

Again, thanks for posting and I'd welcome any thoughts -- esp from folks nearest to this trading. I'm certainly not riding it.

pedro

[skott]

Is it just me, or does this guy fail to really explain his theory? circle, after circle ending in the middle of a circle. I got dizzy reading this.

[flyers&divers]

Pedro, I am not an economist, just a trader who seldom plays with a full suite of cards. What I did get and I did not realize before is that the Carry is another instrument to house some of the incresing flow of Dollars and that not only the traders profit from it but the US government benefits as well. Having all the hedge funds and the US government on that side makes my little Yen futures long trade looking less smart except I have been scaling in and out (still keeping a small core position on runups) and it has been very profitable. It seems like while the Yen may go lower there are enough nervous shorts or occasional Yen-positive news to give a Yen a temporary burst - its been happening every few days - that gives me achance to unload my new layers of longs. I am scalping Crude Oil during the day and I originally happened on this trade looking for a passive strategy that I can implement with resting orders. Perhaps you could email my countryman Antal to get a clarification of the point you questioned. Regards, F&D

[selecto]

"... borrow yen at 1% and go long $ bonds at 4%... That's whimpy. Real men can leverage those yen 20-1, and have. Therein lies the caution.