The Short View: End to ‘carry trade’?
The Short View: End to ‘carry trade’?
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 1 2007 18:27 | Last updated: August 1 2007 18:27
The credit market is not the only source of liquidity for world markets that is under threat. The “yen carry trade” – selling short the yen, at its low interest rates, and buying high-yielding currencies such as the New Zealand dollar – also looks sickly.
This trade, popular with hedge funds, is vulnerable to a rise by the yen. And in the last month, the dollar has lost 4.3 per cent against the yen, while the kiwi has lost more than 7 per cent.
This subject generates intense controversy. It is impossible to prove how important carry trade cash is for world stock markets.
But so far this year, the S&P 500 and the New Zealand dollar/yen exchange rate have tracked each other almost perfectly. The S&P strengthens on days when the kiwi goes up, and drops on days when the yen recovers. On fundamentals, there are few reasons why these two markets should be aligned. Thus this shows that traders believe cheap carry trade money is important for US stocks.
The yen could easily fall back from here. Japan is gripped by political uncertainty. But many analysts think the Bank of Japan will raise rates this month, and little chance of this has been priced into the market. So there is a risk of further appreciation for the yen, taking carry trade cash away with it. This adds yet more doubt when markets scarcely need it.
Some say the carry trade is not the speculative bubble it first appears. They rely on “Mrs Watanabe” – the archetypal Japanese retail investor. With tiny interest rates at home and a weakening yen, it makes sense for Mrs Watanabe to put her money overseas. She weakens the yen and boosts other markets as she does so. She even seems to be making more bets against the yen at present.
But Mrs Watanabe may not be reliable. A few weeks ago, she was sitting on gains of 40 per cent in a year, in yen terms on foreign stocks, as measured by the FTSE World ex-Japan index – which has since dropped 9 per cent. Might she take profits?
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 1 2007 18:27 | Last updated: August 1 2007 18:27
The credit market is not the only source of liquidity for world markets that is under threat. The “yen carry trade” – selling short the yen, at its low interest rates, and buying high-yielding currencies such as the New Zealand dollar – also looks sickly.
This trade, popular with hedge funds, is vulnerable to a rise by the yen. And in the last month, the dollar has lost 4.3 per cent against the yen, while the kiwi has lost more than 7 per cent.
This subject generates intense controversy. It is impossible to prove how important carry trade cash is for world stock markets.
But so far this year, the S&P 500 and the New Zealand dollar/yen exchange rate have tracked each other almost perfectly. The S&P strengthens on days when the kiwi goes up, and drops on days when the yen recovers. On fundamentals, there are few reasons why these two markets should be aligned. Thus this shows that traders believe cheap carry trade money is important for US stocks.
The yen could easily fall back from here. Japan is gripped by political uncertainty. But many analysts think the Bank of Japan will raise rates this month, and little chance of this has been priced into the market. So there is a risk of further appreciation for the yen, taking carry trade cash away with it. This adds yet more doubt when markets scarcely need it.
Some say the carry trade is not the speculative bubble it first appears. They rely on “Mrs Watanabe” – the archetypal Japanese retail investor. With tiny interest rates at home and a weakening yen, it makes sense for Mrs Watanabe to put her money overseas. She weakens the yen and boosts other markets as she does so. She even seems to be making more bets against the yen at present.
But Mrs Watanabe may not be reliable. A few weeks ago, she was sitting on gains of 40 per cent in a year, in yen terms on foreign stocks, as measured by the FTSE World ex-Japan index – which has since dropped 9 per cent. Might she take profits?
posted by Carlos T Mock @ 8:23 AM
0 Comments:
Post a Comment
<< Home