Category: Japanese Yen

The Japanese Yen starts the New Year with a bang as it follows the Chinese Yuan on a fast course against the Dollar.

The Yen was trading about the 114.00 level on December 27. Today we are at about 108.40 two hours before the New York stock markets open. The Chinese Yuan continues to gain strength and is now at about 7.30 to the Dollar.

This rapid change of levels is not just in the Yen and Yuan, The US Dollar is getting hammered against the Euro and Swiss Franc to mention just a couple of currencies. The British Pound is fading against major currencies along with the Dollar as the British economy, much like the US, faces severe problems caused by the housing market and related subprime mortgage loan market. It’s time to pay the piper for the over extension of credit.

Yesterday was a heavy down day for the Dow as it lost over 200 points. At some point, probably to be reached very soon, you can expect even heavier selling of equities as investors begin to realize that a rapid fall in the Dollar is going to cause even more problems for the US economy.

The gold market is trading at all time highs at 864 as I write and crude oil is just barely below $100 a barrel. A sharply falling Dollar will only assist those largely Dollar denominated markets to move even higher. Gold at record prices should be taken as a sign that folks around the world are losing faith in paper fiat currencires, like the US Dollar.

USD/JPY Strength Forecast for next week.

The USD/JPY closed today at 116.42. A close above 116.25, 116.30 turns the momentum back to the upside with the recent high of 117.13 a target for next week.

The hourly, daily, and weekly charts are now pointed in the same northerly direction for US/YEN. I would look to be a buyer of USD/YEN on the dips and look for a nice move to the recent highs.

The US economic releases today were surprisingly strong. The US Commerce Department said that new home sales rose to an annual rate of 870, 000 in July. This was a 2.8% increase from the June rate and well about expectations. In addition, the US Commerce Department stated that durable goods orders rose by 5.9% in July. This was a much higher number than expected by economists.

The strong economic data helped to fuel a stock market rally that took the Dow industrial averages to 13.378.78. up 2.75% for the week. Concerns about a liquidity crisis seemed to have abated by weeks end.

There seems to still be a high degree of correlation between USD/YEN movements with the Dollar gaining against the Yen on strong stock market rallies and falling as stocks pull back. With the Dow closing above the closely watched 13,300 resistance level look for a positive start next week for stocks and USD/YEN.

However, a word of warning.  The liquidity that quickly surfaced as the sub prime mortgage housing lending market came unhinged can quickly return. The forced liquidation of carry trade positions can spread to all asset classes , like marketable stocks, as hedge fund operators are forced to sell good assets because such a large percentage of their funny money derivatives portfolios are not readily marketable.  

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.

Over the past several years hedge fund managers grew accustomed to making solid returns by engaging in Yen positive carry trade transactions. The “carry trade” became an easy way for hedge fund managers to rake in profits and big fees without doing all that much work.

A brief explanation of how that was an easy way to make money is that fund managers were able to borrow yen at extremely low interest rates as the Japanese economy languished in a deep recession. The cheap money could than be exchanged for, say US Dollars, and used to invest in higher yielding investments.

This trade worked beautifully with a weak Yen, extremely low interest rates in Japan, and a US home mortgage market that was robust. A lot of the funds borrowed in Yen were reinvested in US sub prime home mortgages. It was a wonderful world while it lasted.

Now market conditions have drastically changed. The fund managers are getting hit hard at both ends of the trade. The Yen is strengthening as the Japanese economy improves and the US Dollar tumbles against all major currencies. The strong Yen costs hedge funds money as they have to eventually buy Yen back to settle their loans.

Then the disaster in the sub prime home loan lending market is killing the hedge funds. Many sub prime borrowers are not able to repay their loans, especially ARM’s, as interest rates and payments are reset at much higher levels than set at the loan closings. Thus the hedge funds have invested in assets that have turned very sour.