Rhody Trader
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Figure out the value of the equity position (or the cost of it if you're doing a leverage play), then figure out what that is in Yen.
Well, a £10 per pt bet on the SNP (equates to about £1 per 0.1pts) at an index value of 1,000pts = £10,000?
GBPJPY is at 135. So, £1 on GJ would be £13,500.
So, the ratio would be £10 on the ES to £0.70 on the GJ.
But then GJ isn;t the greatest carry trade pair. AJ is the better so do I then need to compare the GBPAUD rate or the AUDJPY rate?
But when we're talking about the SNP, the contracts are quoted in $ so should I be converting the trade amount £10 ($15) into $ first and then multiplying by the index value?
Or let's take the FTSE, a £1 trade on the FTSE = £5,000 in the real market place.
So, £3 on the FTSE compared to £1 on GJ.
With bonds it's a little harder as the price is quoted as 123.xx but each bond is $10k?
Rhody Trader
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Realize here that you aren't in any way, shape, or form doing a carry trade here. If you were, you'd be borrowing in Yen, swapping to another currency, and investing in an instrument denominated in that, the idea being you make much higher rate in the latter. For example, borrowing Yen, swapping to Aussie, and buying Aussie bonds. The hope is that AUD/JPY stays relatively stable so as not to wipe out your carry trade profits.
If you're just looking to match an equity market position against the likes of AUD/JPY you're just doing a spread trade. You playing the equity performance against that of a currency pair viewed as being closely tied (via the carry trade) to how stocks perform.
If you're just looking to match an equity market position against the likes of AUD/JPY you're just doing a spread trade. You playing the equity performance against that of a currency pair viewed as being closely tied (via the carry trade) to how stocks perform.
Yes, but in doing a spread trade in the UK, we don;t have the exact $ amount of the instrument because we trade per pip or per point (spread bets or CFDs) so the calculation must be different?
They are high probability trades, not without risk of course, but it's not as easy as in the US where you can just buy $x of the ES and say the equivalent in yen...of course further complicated by the fact that it's converted to aussie dollars and then US presumably.
To gain the interest, doesn't the trade have to be held in aussie dollars all along? So, are these guys trading the ES with an account in aussie dollars?
I think I'm getting confused on the fact that I'm using the USDJPY rate first and then converting through AUDUSD or GBPJPY, ie working out how much yen is the equivalent.
1 unit on ES = x units in yen from USDJPY = x units in aussie$ from AUDJPY = x units in £ from GBPAUD?
...or is it more simple.
1 unit on ES = x units in AUD from AUDUSD = x units in £ from GBPAUD and forget about the yen...
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Rhody Trader
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The carry trade is about borrowing cheap and investing elsewhere for the higher return. You could borrow yen, convert to dollars, and put that money to use in the ES. That would be USD/JPY. You could borrow yen, convert to pounds, and put it into the FTSE. That would be GBP/JPY. You could borrow yen, convert to aussie, and put it into Australian stocks. That would be AUD/JPY.
But that's not what you're looking to do. You want the carry trade via the retail FX market. The best spread there is AUD/JPY. If you also have an equity position, then that is either a hedge against the AUD/JPY position (if you short the index), or a twofer bet on economic improvement as both AUD/JPY and the index will tend to move in the same direction (at least in the current cycle). If you are looking to run a hedge, then you need to look at correlations from a GBP value perspective, as that is your account currency.
But that's not what you're looking to do. You want the carry trade via the retail FX market. The best spread there is AUD/JPY. If you also have an equity position, then that is either a hedge against the AUD/JPY position (if you short the index), or a twofer bet on economic improvement as both AUD/JPY and the index will tend to move in the same direction (at least in the current cycle). If you are looking to run a hedge, then you need to look at correlations from a GBP value perspective, as that is your account currency.
If you overlay AUDJPY against the ES, the correlation is very close, so it doesn;t really explain the AUD part. People are borrowing JPY against the AUD but investing in the ES market?
scose-no-doubt
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Borrwing yen and investing in anything and everything with yield higher than cost
scose-no-doubt
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Unless the correlation exists because of a factor other than simple rate differentials etc... could be due to liquidity. We know (now anyway or would have made hella cash lol) that the S&P bounced due to increased liquidity so that is an interesting correlation to me 
hope you solve the puzzle dude I'll be watching with interest. Rhody trader prob already knows what o make of that.
hope you solve the puzzle dude I'll be watching with interest. Rhody trader prob already knows what o make of that.
Rhody Trader
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Like I noted before, the AUD/JPY vs. S&P correlation is a function of both reacting to the same basic fundamentals. The carry trade, as represented by AUD/JPY, is on the rise (greater demand to borrow and convert out of the yen, higher demand for higher interest rate currencies) becomes more popular when the economic backdrop is good because it increases the prospective returns of the strategy and reduces the risks. Same with stocks.
But if people are borrowing the yen to buy the ES, I don't really follow why the AUDJPY is so closely correlated. The link between ES and AUDJPY is showing that people are borrowing yen and converting them into aussie dollars, no? What happens after that point for them to buy the ES< they have to convert into US dollars but that means the USDJPY should be more closely correlated with the ES :|
I could put up a similar chart of the EURJPY, which has good correlation too but the EUR is not as much of a high yielding currency.
scose-no-doubt
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Look at the yield curves of the two. People are borrowing yen and buying aussie for the carry on rate differential as well as borrowing yen to but up indexed stock. I think that the money flowing into both is the reason for the correlation. Thats what I was trying to say before.
But wouldn't you expect that when the ES was bought (even with leverage), that the AUDJPY correlation would change?
Borrow yen, convert to AUD, then convert to US to buy the ES.
That's the same as borrowing yen to convert to US directly but the USDJPY has no such direct correlation with the stock market.
I can understand that yen would be borriws and converted into both AUD or US to get the carry but any conversion to US would immediately change the AUDJPY cross rate therefore throwing off the correlation?
scose-no-doubt
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It is my understanding (again newbisticism) Yen is strengthening against USD due to demand and the fact that there is again a rate differential in the short end of the yield curve.
Borrow yen and buy aussie deposit and borrow yen buy ES. Two diff trades. Thats what I think but I'm by no means an expert.
If the dollar weakens against the two then the correlation in aus/yen and es result of USD the inflows no?
Bear in mind I'm just learning like you lol.
See how SP in yen compares to aud/jpy and you'll have the same denomination to check the correlation
Rhody Trader
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Overall, the JPY is pretty well correlated (inversely) to the stock market. Folks are borrowing yen to convert to all sorts of currencies to invest in a whole array of markets (stocks, bonds, commodities, etc.). This is not strictly an ES trade. In fact, I'd argue the ES part of it is relatively small. This is why I keep saying it's not about people specifically borrowing yen to tradet he ES. It's about how the same things drive the carry trade currencies and stock prices.
Ok, thanks.
Were my calcs. correct because something seems off?
If I buy £10 per point of the ES (same as £1 per 0.1pts) and wanted to do a spread trade on the AUDJPY, what would be the equivalent?
£10 on the ES = £1,100 = $1,738 (at exchange rate 1.58)
that would be YEN 149,468 (at ech. rate 86)
which would be AUD 1,892 (at exch. rate 79)
which = £2.30 per pip in AUDJPY (1892/79/10)?
£10 on the ES = £1,100 = $1,738 (at exchange rate 1.58)
that would be YEN 149,468 (at ech. rate 86)
which would be EUR 1,311 (at exch. rate 114)
which = £1.15 per pip in EURJPY?
Bonds - lost on that one. If a bond is at 123 is that $123 per bond or $12,300 per bond?
Were my calcs. correct because something seems off?
If I buy £10 per point of the ES (same as £1 per 0.1pts) and wanted to do a spread trade on the AUDJPY, what would be the equivalent?
£10 on the ES = £1,100 = $1,738 (at exchange rate 1.58)
that would be YEN 149,468 (at ech. rate 86)
which would be AUD 1,892 (at exch. rate 79)
which = £2.30 per pip in AUDJPY (1892/79/10)?
£10 on the ES = £1,100 = $1,738 (at exchange rate 1.58)
that would be YEN 149,468 (at ech. rate 86)
which would be EUR 1,311 (at exch. rate 114)
which = £1.15 per pip in EURJPY?
Bonds - lost on that one. If a bond is at 123 is that $123 per bond or $12,300 per bond?
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scose-no-doubt
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10k bond at 123 = 12300 but bonds are denominated in sets of $100 when prices are quoted
What are some of the "same things", I mean, I guess people could be borrowing yen to convert into bonds. Traditionally bonds move opposite to stocks although recently they've been moving the same way. If it was computers realigning the stock markets to fair value with the yen, you;d expect the process to be a lot quicker yet the correlations always seem to have some delay in them.
On the other hand, if it wasn't computers and the "tings" driving the currency trades, why would the correlation be so perfect?
Rhody Trader
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The same fundamental drivers, like I noted before. Positive economic fundamentals = good for asset markets and thus good for the carry trade. Negative fundamentals or nervous markets = bad for asset markets and thus bad for the carry trade.
Or commodities. Or direct investment. Or any number of other posibilities.
This is not really true. At times stocks and bonds move together. At times they move in opposite directions. I really depends on where we are in the economic cycle.
The stock market doesn't have a "fair value" in regards to the yen. A stock's fair value is based on the value of that business, not on the value of a foreign currency (though the latter may be a factor in the former).
It's not. In the last year, the 1 month correlation between USD/JPY and the S&P 500 never reached 100%. It's chopped around between about -70% and 95%
