Yen Carry Trade

Yen carry trade panic is unfolding as Yen positions are being forced to be liquidated.

The Japanese Yen is making strong gains against the US Dollar and other currencies today, especially Kiwi and Aussie Dollars, as panic hits the hedge fund operators and others who thought that the positive carry in the Yen carry trade would last forever.

In the Yen carry trade speculators and hedge fund managers became fat and lazy over the past few years.

They were able to make loans in Yen at very low interest rates and then invest the borrowed funds into higher yielding assets. Hedge funds were large participants in the “positive Yen carry trade” as it was until very recently an easy way to get a good return.

Unfortunately, those involved in the carry trade seemed to forget that the trade carries the risk of foreign exchange exposure. For the trade to be profitable the Yen must remain stable or even better weak against the currencies that Yen is being exchanged for in order to make higher yielding investments.

Foreign exchange operators who had taken loans in Yen because of the very low interest rates are now buying back the Yen to repay those loans. That carry trade unwinding is carrying the Yen to new highs not seen since mid 2006.

The debacle in the sub prime lending market, which hedge funds are large participants in, has forced the liquidation of investments in the hedge funds portfolio. As investments are liquidated the Yen carry trade loans must be paid off. The huge problem for the hedge fund managers is that as these positions are unwound the Yen gains strength as massive amounts of Yen are being brought within a very short time frame in order to pay off the Yen dominated loans.

In short, the Yen carry trade has turned massively negative and becomes even more so as the hedge fund managers panic. The business of unwinding positions further strengthens the Yen and brings forth more losses and panic.

This global meltdown is serious business. The derivative market may be the next to crack. That market is so huge and so poorly understood that the worse by far of the worldwide financial meltdown is probably yet to come.

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