Posts Tagged ‘Carry Trade’
Commodities Snapshot
Wednesday, November 5th, 2008
A snapshot view of commodities reveals that they have all experienced some mild recovery at the end of the month of October, as liqudation pressure caused by the deleveraging of hedge fund and bank balance sheets which wreaked havoc on markets during the month subsided. Its been little more than a week since TARP began deploying funds in a meaningful way. Also, another factor seems to have been the destabilization that was caused by the covering of short positions in Dollar/Yen carry trades that forced further liquidation in equity and commodity markets making October 2008 the worst month in 21 years. These conditions have been profoundly deflationary.
The following chart shows how as a result of high commodity prices the daily cost of living rose incrementally to a high of an additional cost per capita of $4.77. While the turmoil in commodity market has been terrible for investors, the turn has been beneficial to comsumers, who are now enjoying a $2.58 dividend off the resultant cheaper cost of living.
In the above chart we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. (Bespoke)
Volatility in commodities is sure to continue and their prices have still a long way to go before the upper limit of the current downtrend line is broken. Under present circumstances, if you consider the economic growth numbers for the US economy continue to show up in the negative GDP growth and the credit market volatility continues to reign on the markets’ parade, commodity prices could face more downward pressure.
Charts: Bespoke Investment Group
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Tags: Banks, Carry Trade, Chart, Commodities, Credit, Credit Market, Economy, energy, GDP Growth, Gold, Markets, Natural Gas, Silver
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Resurgent Yen a Global Destabilizer
Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year:
- The Carry Trade and Markets? What is the relationship?,
- Resurgent Yen is Scary News,
- Why the selloff in commodities and emerging markets?,
- More Carry-Trade commentary
- More volatility coming and more ETF options
- Yen’s Strength [has been] profoundly negative for global markets
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
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Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
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Hendry: 10-20 Years to Recover Thanks to ECB
Thursday, October 23rd, 2008
Hugh Hendry, CIO, Eclectica Asset Management told Power Lunch Europe that it will take 10-20 years to heal from the current turmoil in markets. This is a must see interview.
click image for video
Here is the summary of the interview:
Hendry has avoided risk the last few years. His hedge fund is up 20% YTD and 42% this month. He has been investing more heavily in long term US treasuries recently. Hendry is looking at increasing the risk exposure in his hedge-fund’s portfolio.
He pointed to Mervyn King’s hinting toward the “R” word as putting it mildly, that the big “D” is in the forecast.
“It’s not a question of losing out in a recession, I’m talking about 10 or 20 years before we recover from this. This is a catastrophe,” Hendry told “Power Lunch Europe.”
Hendry made an example of Hungary. He lambasted the Hungarian central bank governor, Mr. Andra Simor, who described the situation as akin to “the slower antelopes in a chase being devoured by lions one after the other.”
This stems from Hendry’s past involvement in discussions with European financial officials about European convergence.
Hendry specifically alludes to discussions he’d had with the Hungarian governor in particular regarding the integration of Hungary into the EU and that he warned against the way in which they planned to finance their move with Swiss Francs and Yen via the carry trade.
While in violin-playing posture, Hendry claimed,”It’s tragic.”
“What it [the reel] doesn’t reveal is that I sat there, he just said, you’re rubbish. I’m Hungary. I’m going join the EU. My interest rates are 8% and they’re going to be 4%. You’re a fool, You can’t catch me Mr. Lion, I can outsmart you, I can outrun you. And I said “I dare you.”
I said, “I’ll give you a head start.”
They suspended all economic rationality. Mortgages were given to poor people in Swiss Francs and Japanese Yen. They took on an enormous foreign exchange risk, because they thought that the little antelope could outrun the lions of economic intelligence. And you can’t.
Hendry said, “You can game the system, but you can’t beat it.”
There’s nothing crude, there’s nothing moral here. They were wrong.”
Dominoes. Iceland, Hungary, Latvia, Bulgaria, Eastern Europe, the dominoes are crashing. There’s economic disequilibrium. The economic chaos which we ignored for 5 years because we were bribed to ignore it, because they paid high interest rates. It was a bribe to ignore reality. But in a world where everything is falling down, the dominoes just crash. There is no answer.
Hendry’s beef is with EU and UK regulators and officials.
“I’m the heretic. I was laughed at, scoffed at, dismissed, ignored, at a time when investment bankers who advise governments, and who manage money, took reckless risk upon reckless risk.
We reached a point at which the Royal Bank of Scotland had a bigger balance sheet than the economy. Everyone looked the other way. Its not a question of losing out in a recession. I’m talking about 10 or 20 years before we recover from this. This is a catastrophe.
Forget about Mervyn King, UK Finance Minister, saying the “R” word. You wait until he says the “D” word.; depression. We had interest rates in the UK at 5% for a year as everything collapsed.
There’s a notion of stall speed. Never allow an aircraft to reach stall speed. That is the pledge central bankers must make. ” We won’t allow the economy to reach stall speed,” because everything below that you’re pushing on a string.
Interest rates in the UK will be 2% at the end of next year, and they’ll be 2% at the end of the year after that.
The ECB, the most hideous, intellectually conceited group of bankers, raised interest rates this summer; history will send the ECB to damnation because they have sent us to damnation. That’s the reality.
Thank you Mr. Hendry.
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Tags: Carry Trade, COT, ECB, Economy, energy, Euro, Fed, Hugh Hendry, interest rates, Japan, Markets, Mortgage, Recession, SMI, UK, Video
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The Devil’s Dictionary for Financial Markets
Monday, September 1st, 2008
The Devil’s Dictionary, was originally published by Ambrose Bierce. Think of him as the forgotten brother of Mark Twain. Both had remarkably similar lives, were good friends, and lived in San Francisco around the same time. Bierce, however, followed a different path than Twain. While both had similar humour, and were equals in their genius, Bierce clearly was the better when it came to wit. Public figures quaked in fear of his satirical pen, and newspapers sales soared when he was published. Over the years, many of his jabs at the establishment appeared in local newspapers and were later collected into The Devil’s Dictionary, one of the greatest works of satire of the 19th century.
We present you with Norgate Investors’ Services version of the Devils Dictionary for financial markets.
Analyst recommendations: –
Strong Buy – Buy
Buy - Hold
Hold – Sell
Sell – It’s too late.
Arbitrageurs: – large traders who feed on plankton.
Averaging down: - lowering the average price of entry by adding to a losing position.
Averaging down should only be attempted when you are really angry at a market.
Back–testing: – the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.
Black-box system: – a trading system that is available for sale, but is so good that its rules can’t be disclosed. Black-box systems are generally only available for sale because the vendors have a sense of philanthropy.
Cancel-if-close: - a limit order that is cancelled if it appears likely to be hit. Some brokers do not accept cancel-if-close orders.
Carbon credits: - A scheme developed by brokers requiring traders to purchase millions of dollars of carbon credits at the end of each financial year to offset the printing of their contract notes.
Charting: - “join-the-dots” for adults.
Central Banks: - big market players, with no stop-losses. The Bank of Thailand once bet 40% of its foreign reserves in a day. It lost.
Computerised system testing: - torturing the data until it confesses. See: back-testing
Contrary opinion: - the idea that when the market dumps a security, you should look to buy it. The trick appears to be to make sure that the market has finished doing the dumping, and is not just waiting for you to buy so that it can really start dumping. See: Institutional investor.
Cycle analysis: - a method of analysis that allows losing trades to be organised into regular patterns.
Derivatives: – securities that are identified by acronyms - CHIPS, COBRAS, LEAPS, PERQS, STEERS, TRIPS, ZEPOS – all of these things are derivatives. Unfortunately, little else is known about them.
Daytrading: - an activity that takes place in between meaningful periods of employment.
Dot.com bubble: - tulip-mania for the X-generation.
Dow Jones Industrial Average: – a widely reported stock index that was designed in the late 11th century and has stood the test of time.
Drawdown: - A figure that immediately grows when a trading system transitions from paper trading to real trading.
Eurodollars: - U.S. Dollars, of course.
False Break: – an actual break of a trendline that triggers a losing trade. False breaks confirm the usefulness of trendline analysis. Only those breaks that are false cause problems, and those breaks don’t count, because they are false.
Fast market: - an official market condition, during which floor brokers may scalp you with impunity. At other times, they have to be careful about it. See: slippage
Figures: - market-sensitive measures of economic activity, such as “Non-Farm Payrolls” and “Durable Goods Orders”, that are published every day in the U.S., much to the annoyance of players on the other side of the world, who can’t get to sleep.
Float (initial public offering): - stock that is offered to you because other people have turned it down. The guiding principle in relation to floats is as follows: “never participate in a float that you are able to participate in.”
Forex market: - a private casino, which is run by large international banks, mainly so that they can have some fun.
Fundmental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.
“Fundamentally sound”: - the condition in which an economy finds itself immediately after a stock market collapse.
Gold carry trade: - in the gold carry trade, institutions called gold banks borrow gold from the central bank at the gold lease rate, which may be 1%. They can then sell this gold and invest the proceeds in Treasury Bills, which may yield 4%. The central bank keeps the gold on its books, figuring that it can trust a gold bank. Of course, the gold bank is “short” the gold until it pays it back, and it must take care that the gold price doesn’t get away from it. This may, or may not, explain a lot about the gold market of the 1990s.
Greeks, the: - Delta, Gamma, Rho, Theta and Vega. In option pricing models, the Greeks are partial derivatives that express local sensitivities. Just remember the names of about three of them, and then slip them into the conversation occasionally. No one will pick you up on it.
Hedge Fund: - a fund that pools money from rich investors, in order to play with it. Hedge Funds are private concerns, which means that they can play wherever they like. Mutual Funds, on the other hand, accept money from the public, and can only play where they are supervised.
Hedger: - a guy you can’t beat when you’re playing him at futures. When a hedger loses a bet in the futures market, he makes up for it in the cash market. When a speculator loses a bet in the futures market, he really loses it.
Index Funds: – funds with no sense of fun.
In-house analyst: – an employee of a broking house who dresses mutton up as lamb and advertises it on special.
Institutional investor: - someone who dumps a stock big-time, a day or two after you’ve bought it, for no apparent reason.
Limit moves: - An unexpected but welcome holiday for pit traders invariably caused by fat-finger-syndrome-suffering Japanese traders.
Live feed: - a technology that enables the instant incorporation of bad ticks into a charting program.
Long Term Capital Management: - a large hedge fund, whose capital only managed to last for a short time.
Lunch: – when you ring your broker on a Friday afternoon to be told he’s still at lunch, it means he’s still drinking.
Market Depth: - a trading screen that shows orders queued up on both sides of a market. Unfortunately, it doesn’t show the orders belonging to people who don’t like to queue.
Market report: - a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.
Maximum Adverse Exeuction: - The employment status of a trader at Société Générale in January 2008 after losing the bank €4.9 billion.
Money-management: - the art of hiding trading losses from a spouse.
Non–executive Director: – a person who’s job it is to fill a chair at a Board meeting, so that no chairs are empty.
Option Pricing Model: - a mathematical model, that can calculate the fair price of an option. If the market price differs from the fair price, you can bet accordingly. If the market price then moves further away from the fair price, you can say: “Hey, that’s not fair!”
Over-bought: – a market is considered to be in an over-bought condition when everyone else appears to have bought it, but you haven’t.
Peak oil: - The point in time at which your highly leveraged long crude oil position enters an impossibly steep downtrend.
Personal computer: - an indispensable aid to the modern investor. Investors who are new to computers should consider the following advice:
Always approach your P.C. in a confident manner. Computers can sense fear and indecision. Remember – you are in charge! You can always shut the thing down (unless you’re using Win98).
Position trade: - a short-term trade that is in deficit, and will be closed out as soon as it breaks even, however long that takes.
Price/Earnings Ratio: - a ratio that indicates whether the price of a stock is attractive in relation to last year’s earnings. A low number indicates a bargain. However a low number can also indicate a lemon. If a company starts going down the tube, its stock price will appear very attractive in relation to last year’s earnings. The P/E Ratio is a versatile indicator.
Random Walk Theory: – the theory that market prices follow a random walk, much like that of a drunken sailor. The weakness of the theory lies in the fact that little scientific research has been done into drunken sailors.
Rumours: - the time-honoured basis for the making of trading decisions. Rumours about stocks tend to get thicker as they are spread.
Seasonal analysis: - the assumption that other people who trade Heating Oil Futures know nothing about winter.
Slippage: - the difference between the price at which you expect a market order to be filled and the price at which it is actually filled. See: Orange Juice Futures.
Stochastics: – a technical indicator so-named because the name sounds technical.
Stop-loss: – the trader’s equivalent of a condom. It’s something you know you should have used after it’s too late.
Support: - a line drawn on a chart, the breaking of which is deemed extremely significant, even if the only people trading the stock at the time are two of three ladies at the tennis club.
Support/Resistance: - supposed allies that flee at the first sign of trouble.
Tankan Index: - a closely watched figure, that measures the extent to which the Japanese economy is tanking.
Technical analysis: – subjective analysis of the markets dressed up in a lab coat.
Technical indicator: – a transformation of a price series that contains less information than the series itself. Different technical indicators throw away information in different ways.
Tech wreck: - the end of the dot.com bubble. Surprisingly enough, many observers predicted the wreck accurately. As time goes on, more and more of these observers come forward.
They: - the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, “they ran the market to my stop and then turned it around.”
Trading floor: - the traditional venue for the negotiation of securities, now made redundant by screen trading. Trading floors that remain open serve a valuable purpose as colorful backdrops to market reports on television.
Trading genius: - a reckless spirit in a bull market.
Trendline analysis: – a form of analysis that works best on a computer screen, where lines can be erased and re-drawn without trace.
Zero-sum game: – a game in which the players slug it out and the broker wins.
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Tags: Banks, Brokers, Carry Trade, Chart, Credit, Crude Oil, Derivatives, Dollar, Economy, EFU, energy, Euro, Gold, humour, Information, International, Japan, Markets, Technical Analysis, Trading
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Yen’s Strength [has been] profoundly negative for global markets
Thursday, March 27th, 2008
March 27, 2008 - Donald Dony, The Technical Speculator, offers the following explanation of how the strengthening of the yen to a twelve year high against the US dollar has had a profoundly negative effect on global markets, in the past and during the most recent 6-7 months. We would also add that while Mr. Dony does a great job of explaining this concept, he also points out in the present tense that as the cheap money is quickly evaporating, so is the global market.
Our sense is that the yen broke through par, a level (usd/yen<100) that required intervention (which came last week), primarily by the BoJ to maintain it at levels that are more supportive of Japan’s economy. For this reason, it may be that if the yen has reached a turning point, that a new round of carry trade in the yen could provide stimulus and/or support to global markets at these levels. Change that to evaporated, past tense.
Global equity traders had, for many years, a ready source of funds at almost no interest charge. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world. However, as of mid-2007, that “free bank account” is becoming more and more costly. The Yen carry trade is starting to unwind with very negative results for stocks.
But what is the “Yen carry trade”? Simply put, it is borrowing at very low interest rates in Yen and using the loan to buy higher yielding assets elsewhere. During the past 12 years, the trade has become standard business practice for many institutional investors. Perhaps the most popular form of the strategy exploits the yield gap between U.S. and Japanese fixed income securities. Another plus that came with the Yen/U.S. cross was from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the Yen loan.
But all of this endless liquidity is quickly coming to an end and with bearish consequences to global equity markets.
Chart 1 illustrates the tight connection of the Japanese currency with global stocks. With every major rise of the Yen throughout 2007, there was a mirrored decline in the Dow Jones World Stock Index. Quite simply, the global equity markets began to fall when the tap was turned off to cheap money. Traders are now forced to buy back massive Yen short positions and sell assets to pay for it.
And what is happening to the Yen?
Chart 2 shows the Japaneses currency is breaking through a decade old resistance levels and surging to new highs. And this trend shows no signs of reversing. The upside target is 120.
Bottom line: The bearish impact of the advancing Yen is clearly apparent on global stock markets. World equities appear to have been propped up largely due to the availability of foreign liquidity. As this “cheap money” is quickly evaporating, so is the global bull market.
Donald W. Dony FCSI, MFTA
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Tags: Carry Trade, Credit Market, Currency, Markets, Technical Analysis
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More Carry-Trade commentary
Tuesday, January 22nd, 2008
Jan. 22, 2008 - Here are some more clippings about the ‘carry-trade’ at the heart of global market volatility:
Jan. 21 (Bloomberg) — The Australian and New Zealand dollars fell against the yen as concern over a slowing U.S. and global economy spurred a reduction in holdings of higher- yielding assets bought with funds from Japan.
The New Zealand currency traded near the lowest in almost two months versus the yen as a slump in Asian stocks deterred investors from so-called carry trades. Australia’s dollar also declined against the U.S. currency after a government report showed producer prices rose by less than economists estimated, prompting traders to pare bets the central bank will raise interest rates from an 11-year high next month.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=ah9E711dlJh4&refer=australia>
Australia’s 11-year high benchmark rate of 6.75 percent and New Zealand’s record 8.25 percent rate drew investors in the past as part of the carry trade strategy. Those rates compare to 0.5 percent in Japan. The risk in the carry trade is that swings in exchange rates erode profits from interest-rate differentials.
The carry trade strategy involves borrowing in countries where interest rates are low, and investing where returns are higher.
Commodities, which make up about 60 percent of Australian exports and 70 percent of New Zealand’s, tumbled since the beginning of last week. Falling global economic growth may reduce demand for commodities these countries export, such as metals.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=a3dRGK0srjXo&refer=australia>
Another nervous week as the ‘carry trade’ unwinds. Many equity indices and Yen crosses are poised at key support levels: ‘necklines’ of ‘head-and-shoulders’ patterns or the lower edge of the big trading band of the last year or so. Leading the pack South are GBP/JPY and Sweden’s OMX Index, closely followed by the Dow Jones Industrial Average and FTSE 100. These have already seen weekly closes below these key levels and should, one by one, topple all the other ones over too. An unseemly scramble is likely if not next week then in February; at-the-money implied volatility could soar.
Energy products and most metals eased, many thinking if not talking recession, and Baltic Dry and Capesize Freight Indices have halved since their peak at the end of last year. Even the more pessimistic are saying contraction will be shallow and short and that by Q3 2008 things will be mended and economic growth will pick up. We feel this is way too simplistic and that the unravelling of all the mess in the financial system will probably take the whole of this year (and then some more).
A ‘flight to quality’ has resulted in Treasury yields moving lower, US ones leading the way to multi-month lows with yield curve steepening seeing two-year TNotes at a mere 2.39% (lowest yield since September 2004). Credit spreads against junk bunds are at July’s record highs. The US dollar has been contained in relatively small ranges around last week’s levels although the Swiss franc did dip very briefly to a new record low (1.0838) as did the Czech koruna (17.318). Sterling has regained some of its composure, EUR/GBP down from a record £0.7614, and the Yen had the best all round performance, dipping to 105.92 to the greenback.
Stock indices are all lower, the New Zealand bourse for a staggering twelve consecutive days while Jakarta and Mumbai are down nearly 8% this week alone. US and European indices lost roughly 5%, many now lower than they were at any point in 2007.
Inserted from <http://www.fxstreet.com/technical/market-view/weekly-market-commentary/2008-01-21.html>
The Japanese currency climbed against higher yielding currencies as investors looked for safe havens amid the turbulence in equity markets. The yen carry trade, where the low-yielding currency is sold to purchase riskier, high-yielding assets, proved a popular investment strategy in the first half of 2007 as stable equity market conditions ensured a healthy appetite for risk.
But the deepening financial market gloom since August has seen carry trades scaled back since the beginning of this year.
The real test of carry trade activity is the relationship between the yen and the New Zealand dollar. The yen fell 15 per cent against the Kiwi between January and August last year as the latter’s interest rate hit 8.25 per cent against Japan’s 0.5 per cent. But the Kiwi has since lost nearly all these gains, and was down 4 per cent this week to Y82.05 as the yen continued its rally.
Inserted from <http://www.ft.com/cms/s/0/0600819a-c634-11dc-8378-0000779fd2ac.html>
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Tags: Carry Trade, Currency, Emerging Markets, Investment Strategy, Miscellaneous, Technical Analysis
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Resurgent Yen is Scary News
Wednesday, January 16th, 2008
Jan. 16, 2008 - Back on January 4, 2008, we wrote that “On days the yen falls to the euro [or dollar], stocks almost always rise; when the yen strengthens to the euro [or dollar], stocks fall. Its almost always a short term concern and the volatility it brings with it can be dramatic, but opportunistic.
Well, here we are facing the latter, as recessionary winds are putting pressure on the US dollar. This article provides a very good overview and it may be that some of this weeks heavy selling across the strongest sectors in the market could be attributed to the pressure on Yen/Dollar carry trade. Read on…
***
At a time where all the news looks grim - from awful results that forced Citigroup to cut its dividend, to bad US retail sales figures that deepened recession fears, to the ZEW survey showing German business confidence at a 15-year low (and, we might add, Wednesday’s FT report that confidence in the UK property market has hit its lowest level since the housing crash of the early 1990s) - the “potentially scariest news of all” is the resurgence of the yen, according to John Authers in Wednesday’s Short View column.
Some analysts are more sanguine, predicting the yen’s surge will be temporary. But Authers points out the Japanese currency’s jump on Tuesday to less than Y107 to the dollar - for the first time since June 2005 - broke what Nomura called the trend of “reasonably steady weakening against the dollar that had been happening since 1994″.
This is important, in Authers’ view, because the yen has become a gauge for risk aversion in the markets.
When traders feel confident, they borrow in yen to fund investments elsewhere. This yields easy profits unless the yen suddenly appreciates. A rising yen betokens fear.
Hence its close correlation with the equity indices, and with equity volatility. Share prices fall, and volatility rises, when the yen does well
The yen’s rise has “nothing to do with fundamentals”, notes Authers. Indeed, the Bank of Japan on Tuesday reduced its economic assessments of four of its nine regions and admitted the economy was slowing, reducing the chances of a rate rise.
A strong yen is not good news for anyone — including the Japanese, he warns. Falls this year have left the Nikkei 225 stock index in a bear market, down 23.4 per cent from its high of July last year. Fears that the revived yen will damage exporters have contributed to the damage.
Are there any signs of light?, asks Authers.
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Tags: Carry Trade, Currency, Technical Analysis
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The Carry Trade and Markets? What is the relationship?
Thursday, January 3rd, 2008
We have been asked on numerous occasions about the carry-trade relationship to stock market movements, and have found an eloquent November 2007 article by Ken Fisher that elaborates on this relationship.
The Carry Trade Connection, By Ken Fisher, Forbes Magazine
A risk to the bull market, which I otherwise expect to continue, would be a materially rising yen.
The Chart [That column] explains how the correlation between daily moves in the global stock market and daily shifts in the yen/euro spread is 93%, startlingly high. On days the yen falls to the euro, stocks almost always rise; when the yen strengthens to the euro, stocks fall.
Emerging markets have benefited largely from the spillover effect of carry trade driven liquidity, and during Yen rallies have been affected adversely. This is due to the activity of carry trade end-users - hedge funds, and carry trade money is usually “hot “money in when the Yen softens, and “hot” money out when the Yen firms up against the Euro and Greenback.
Definitely a factor worth paying attention to, and is behind much of the volatility seen in emerging markets and commodities, May-June 2006, and March 2007, and November 2007.
Ken Fisher, of Fisher Investments, is one of our very long time favourite columnists, who publishes his thoughts in Forbes Magazine. Ken Fisher has an exceptional well-published track record.
He also happens to be Philip Fisher’s son, the dean of “Focused” investing, author of Common Stocks, Uncommon Profits, and the fellow responsible for mentoring Warren Buffett, as a focus investor, post his Graham-Dodd years.
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Tags: BRICs, Carry Trade, Currency, Emerging Markets, Investment Strategy, Miscellaneous
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