Forex volatility puts future of yen carry trade in doubt
Forex volatility puts future of yen carry trade in doubt
in Tokyo
Published: August 22 2007 03:00 | Last updated: August 22 2007 03:00
The recent sharp moves in the foreign exchange markets have raised the question of whether the yen carry trade is doomed to extinction.
Many market participants believe the volatility in the forex markets will make yen carry trades too risky for investors in the future. "These are trades that everyone knew were going to come unstuck and they just did," says Mark Cutis, chief investment officer at Shinsei Bank.
The yen carry trade, whereby investors borrow in yen at low interest rates and invest in higher-yielding assets in other currencies, was popular with hedge funds and Japanese retail currency traders as long as market volatility - and therefore foreign exchange risk - was low.
But amid uncertainty about the broader impact of the subprime problem, volatility in the foreign exchange markets has surged, leading many investors to unwind their positions.
"The hedge funds have panicked," says a managing partner at a large US hedge fund. Funds are shying away from risk because "our mentality today is you have no idea what is going to happen in the world".
Whenever the yen has appreciated against the dollar or sterling in the past, Japanese retail currency traders have mitigated the movement by moving in to sell the currency. For example, the last time the yen strengthened rather quickly - during the Chinese market wobbles in March - Japanese currency margin traders happily came back to sell more yen, helping to keep a lid on the currency's rise.
However, this time the unwinding of the carry trade is occurring with such force that individuals, who borrow about 10 times their own funds to trade, have been forced to unwind as they face automatic stop-loss limits, says Tohru Sasaki, chief foreign exchange strategist at JP Morgan in Tokyo.
Many investors were forced to cut their losses once the yen hit Y115 to the US dollar, says Tsuyoshi Ueda, an official at gaitame.com, which provides services to individual forex traders.
Mr Sasaki estimates that of the Y7,000bn ($61bn, €45bn, £31bn) in yen short positions through margin trading, day traders bought back yen to the tune of Y3,800bn in just one week.
Some believe the strengthening of the yen this time will be temporary and that once stock markets stabilise, Japanese individual currency traders will come back to sell.
Individual traders have been calling in to ask whether it is a good time to start selling yen again, says Naoto Minatogawa, analyst at Himawari Shoken, a leading supplier of services to individual forex traders.
Others disagree. They say that, with the Federal Reserve expected to lower rates and the Bank of Japan clamouring to raise rates, the interest rate differential between Japan and the US will shrink.
One big question is what the large number of Japanese investors who have bought investment trusts or uridashi bonds denominated in dollars and other high-yield currencies will do.
So far, these investors, who have generally invested surplus funds, have stood firm. But if US interest rates start to fall sharply and the dollar plunges - as some believe will happen - even those investors could choose to redeem.
The impact of those retail investors repatriating their funds is likely to be much larger than that which has been seen so far.
As one banker says: "Japan is the provider of the world's liquidity. So the unwinding of that will have a big impact."
Japan watches much of the turmoil from sidelines
Japan's credit markets have not been immune to the turmoil that is affecting markets overseas, even though Japanese banks have limited exposure to the US subprime problem, write Michiyo Nakamoto and David Turner.
However, the impact of the credit blockage in the US and Europe has been relatively contained, because Japan does not face the kind of liquidity crisis that has been seen in the US and Europe. Short-term lending rates in the yen have risen, spurred by a search by borrowers for alternatives to raising finance in dollars.
On Monday, the three-month yen lending rate in the London interbank market (Libor) climbed 10 basis points to a 12-year high of 1.0175 per cent.
In the Tokyo interbank market, rates have also risen, though not by as much.
Commenting on the rise in short-term rates for yen borrowing, Akihiko Yokoyama, bond strategist at JPMorgan in Tokyo, said: "If the Bank of Japan allows this situation for a long time, then interest rate costs will deliver a body blow to (Japanese) financial institutions, because most of them are net cash borrowers."
in Tokyo
Published: August 22 2007 03:00 | Last updated: August 22 2007 03:00
The recent sharp moves in the foreign exchange markets have raised the question of whether the yen carry trade is doomed to extinction.
Many market participants believe the volatility in the forex markets will make yen carry trades too risky for investors in the future. "These are trades that everyone knew were going to come unstuck and they just did," says Mark Cutis, chief investment officer at Shinsei Bank.
The yen carry trade, whereby investors borrow in yen at low interest rates and invest in higher-yielding assets in other currencies, was popular with hedge funds and Japanese retail currency traders as long as market volatility - and therefore foreign exchange risk - was low.
But amid uncertainty about the broader impact of the subprime problem, volatility in the foreign exchange markets has surged, leading many investors to unwind their positions.
"The hedge funds have panicked," says a managing partner at a large US hedge fund. Funds are shying away from risk because "our mentality today is you have no idea what is going to happen in the world".
Whenever the yen has appreciated against the dollar or sterling in the past, Japanese retail currency traders have mitigated the movement by moving in to sell the currency. For example, the last time the yen strengthened rather quickly - during the Chinese market wobbles in March - Japanese currency margin traders happily came back to sell more yen, helping to keep a lid on the currency's rise.
However, this time the unwinding of the carry trade is occurring with such force that individuals, who borrow about 10 times their own funds to trade, have been forced to unwind as they face automatic stop-loss limits, says Tohru Sasaki, chief foreign exchange strategist at JP Morgan in Tokyo.
Many investors were forced to cut their losses once the yen hit Y115 to the US dollar, says Tsuyoshi Ueda, an official at gaitame.com, which provides services to individual forex traders.
Mr Sasaki estimates that of the Y7,000bn ($61bn, €45bn, £31bn) in yen short positions through margin trading, day traders bought back yen to the tune of Y3,800bn in just one week.
Some believe the strengthening of the yen this time will be temporary and that once stock markets stabilise, Japanese individual currency traders will come back to sell.
Individual traders have been calling in to ask whether it is a good time to start selling yen again, says Naoto Minatogawa, analyst at Himawari Shoken, a leading supplier of services to individual forex traders.
Others disagree. They say that, with the Federal Reserve expected to lower rates and the Bank of Japan clamouring to raise rates, the interest rate differential between Japan and the US will shrink.
One big question is what the large number of Japanese investors who have bought investment trusts or uridashi bonds denominated in dollars and other high-yield currencies will do.
So far, these investors, who have generally invested surplus funds, have stood firm. But if US interest rates start to fall sharply and the dollar plunges - as some believe will happen - even those investors could choose to redeem.
The impact of those retail investors repatriating their funds is likely to be much larger than that which has been seen so far.
As one banker says: "Japan is the provider of the world's liquidity. So the unwinding of that will have a big impact."
Japan watches much of the turmoil from sidelines
Japan's credit markets have not been immune to the turmoil that is affecting markets overseas, even though Japanese banks have limited exposure to the US subprime problem, write Michiyo Nakamoto and David Turner.
However, the impact of the credit blockage in the US and Europe has been relatively contained, because Japan does not face the kind of liquidity crisis that has been seen in the US and Europe. Short-term lending rates in the yen have risen, spurred by a search by borrowers for alternatives to raising finance in dollars.
On Monday, the three-month yen lending rate in the London interbank market (Libor) climbed 10 basis points to a 12-year high of 1.0175 per cent.
In the Tokyo interbank market, rates have also risen, though not by as much.
Commenting on the rise in short-term rates for yen borrowing, Akihiko Yokoyama, bond strategist at JPMorgan in Tokyo, said: "If the Bank of Japan allows this situation for a long time, then interest rate costs will deliver a body blow to (Japanese) financial institutions, because most of them are net cash borrowers."
posted by Alex at
8:19 PM
0 Comments:
Post a Comment
<< Home