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Will the Carry trade resume on yen after G7 meeting?
During the weekend the G7 has sent a clear message to the hedge funds on their carry trade on Yen which according to the G7 statement doesn’t reflect the fundamentals of the Japanese economy.
This is true, but the point is that the yen decline is not a reflection of Japanese economy, the decline is a reflection of the interest rate on yen which is very low in comparison with the interest rate on other major currencies, the answer now is if the hedge funds will resume their carry trades on the yen?
The expectation is that this kind of trade will resume strongly bringing the yen much lower as:
1-The Japanese officials are not willing to enter the currency market to help the yen as they confirmed that currency traders are free to set the value of the yen.
2- Lower yen is helping Japan exports in a very competitive Asian export market (see latest Toyota record exports as example).
3-the continuation of big differences on the interest rate on yen in comparison with other major currencies make the risk/reward more attractive of the carry trade on yen
How much the Carry Trade will affect the yen?
The concept of carry trade is borrowing money from a low interest rate currency selling this currency into other one which has much higher interest rate and investing the money again in this currency.
If we will take a closer look into the concept of the carry trade, we can see that the yen decline will take a long time, because it will need time to be completed and with actual low yen interest rate, the expectation is that many players will join this trade selling the yen and bringing it much lower, especially after the green light from the Japanese officials that they will not intervene in the Forex market.
Bearish Technical view on the yen
If we will return to a 10 years USD/YEN chart we can find these interesting bearish points:
1-The (146) USD/YEN rate registered on 8-10-1998
2- The (1.34) USD/YEN rate registered on 2-5-2002
3-The (1.21) USD/YEN rate registered on 6-12-2005
We can see the next move to 1.25 levels and even more to 1.35 but with more data, you can also refer to the chart from 2003 until today, what is remembering you this picture?
Where is the Risk?
We must take a close attention to the G7 message on the hedge funds carry trade on yen, in fact if better than expected Japan fundamentals, a rise in yen interest rate expectation will result a crash on the carry trade among with a sharply demand for the yen which will result big losses for yen short trade.
During the weekend the G7 has sent a clear message to the hedge funds on their carry trade on Yen which according to the G7 statement doesn’t reflect the fundamentals of the Japanese economy.
This is true, but the point is that the yen decline is not a reflection of Japanese economy, the decline is a reflection of the interest rate on yen which is very low in comparison with the interest rate on other major currencies, the answer now is if the hedge funds will resume their carry trades on the yen?
The expectation is that this kind of trade will resume strongly bringing the yen much lower as:
1-The Japanese officials are not willing to enter the currency market to help the yen as they confirmed that currency traders are free to set the value of the yen.
2- Lower yen is helping Japan exports in a very competitive Asian export market (see latest Toyota record exports as example).
3-the continuation of big differences on the interest rate on yen in comparison with other major currencies make the risk/reward more attractive of the carry trade on yen
How much the Carry Trade will affect the yen?
The concept of carry trade is borrowing money from a low interest rate currency selling this currency into other one which has much higher interest rate and investing the money again in this currency.
If we will take a closer look into the concept of the carry trade, we can see that the yen decline will take a long time, because it will need time to be completed and with actual low yen interest rate, the expectation is that many players will join this trade selling the yen and bringing it much lower, especially after the green light from the Japanese officials that they will not intervene in the Forex market.
Bearish Technical view on the yen
If we will return to a 10 years USD/YEN chart we can find these interesting bearish points:
1-The (146) USD/YEN rate registered on 8-10-1998
2- The (1.34) USD/YEN rate registered on 2-5-2002
3-The (1.21) USD/YEN rate registered on 6-12-2005
We can see the next move to 1.25 levels and even more to 1.35 but with more data, you can also refer to the chart from 2003 until today, what is remembering you this picture?
Where is the Risk?
We must take a close attention to the G7 message on the hedge funds carry trade on yen, in fact if better than expected Japan fundamentals, a rise in yen interest rate expectation will result a crash on the carry trade among with a sharply demand for the yen which will result big losses for yen short trade.
