Yen Carry Trade: Predicting A July End

The carry has been the trade of the century, it seems. And, as long as the interest rate differential continues in favor of just about every single country out there vs. Japan, it looks like it will perpetuate into infinity. Up until July, that is.

There's an election in July that the BoJ is very likely to not step on any toes with. After that, I'm thinking the BoJ may push their interest rates up a bit. That could be one of the catalysts for the carry to come to a halt.

There's another that I'm concerned about. The U.S. dollar is getting clobbered right now because of the carry. But, what if the U.S. dollar were to hit lows across the board, and then the USD/JPY were to make a sharp move to the downside? That could very easily rock the carry. I keep putting on smaller and smaller trades with this carry. I'm hedging myself right and left every time I put something on. I'm just leery that at some point we're very likely to see a sharp move lower.

In the meantime, all's fair and game.

Comments

[BillCust:]

Here is some numbers of the Yen Carry Trade as of March. That number is equivalent to US $800 Billion.
The question is then how much is too much? Consider this:
Japan is an actual country with actual people. They don't all trade the yen to invest in Australian$ or Brazilian bond, or Chinese stocks. They need yen to buy food, housing, cars, and the good things in life. A real crisis can happen when speculative yen demand interferes with the real economy demand of yen.

Take the M2 supply: deposit, cash, and quasi money - that number is 700 Trillion Yen, or 6 Trillion US$, or 6000 billion US$. A rule of thumb would suggest that a crisis could be in the making if the business/public suddenly compete with speculators to get Yen!

Currently we are at about 10-15% Yen money supply in terms of the amount being speculated! Common sense suggests to me that there is beginning to be a competition of demand for yen not just among speculators but business as well. I would say if we ever reached 100% of the money being loaned for speculation, there will be serious consequences in terms of regional monetary stabilities.

It's up to the Japanese government to determine whether there should be a stampede today or a monumental stampede later.

2007 Apr 23 11:04 PM