Since July, the Japanese Yen has notched a stellar performance in climbing 15% against the Dollar, without garnering much attention. Within the last week, however, analysts have begun to take notice, as the carry trade temporarily collapsed and the Yen appreciated by another 3%. 'But Japan's Central Bank is no hurry to raise interest rates,' you are probably wondering. 'What on earth is all the fuss about?' Volatility, the sworn enemy of carry traders has exploded. Global capital markets, including the US stock market, are in a state of turmoil. The financial services industry, the perennial bulwark of the US economy, is set to record its worst year in recent memory. Leading the way, so-to-speak, is Citigroup, which recently announced that it will write-down an additional $10 Billion in worthless subprime paper and will also receive a proportionately large infusion of capital.
Carry Trade Gains Favor
It's been rough sailing for the Yen carry trade of late; the technique had been sagging in popularity due to the credit crunch and the associated trend towards risk aversion.
Over the last few weeks, however, the Yen has fallen, which is to say the Yen Carry Trade is making a comeback. First, came the announcement that the world's leading Central Banks would be injecting hundreds of billions of dollars in the banking system, in order to ease growing liquidity concerns. Next, the Bank of Japan hinted that it would hold rates at .5%, the lowest in the industrialized world. Finally, a continued surge in commodity prices virtually ensures that countries rich in natural resources, such as Canada and Australia, remain viable "targets" for carry traders.
Overall, the story remains focused around volatility. In fact, one investment bank discovered an inverse correlation between the S&P 500 and the Japanese Yen. In other words, the appetite for risk appears closely correlated with the strength of global capital markets and the popularity of the Yen carry trade.
GBP/JPY surge the whole day yesterday, while EUR/CHF trended up and made a slight corretion after hitting the upper channel that I mentioned yesterday.
Central Banks Inject Liquidity
After months of delay and perhaps overly wishful thinking regarding the global credit crunch, the world's Central Banks are finally ready to take action.
America's Federal Reserve Bank will join forces with the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank as part of a concerted effort to introduce greater liquidity into global capital markets.
Under the plan, the Banks will auction off tens of billions of Dollars worth of bonds denominated in their respective currencies, and lend the proceeds to commercial banks. The goal of the plan is to to limit growing risk aversion, which has caused banks to significantly rein in lending.
Further, while the move is designed primarily to boost confidence in equity markets, certain sectors of forex may also receive a bump. High-yielding currencies such as the New Zealand Kiwi and Australian Dollar, which have been shunned in recent months, seem to be the most likely beneficiaries.
Read more at Forbes.com
This is good news for collerated pairs hedge traders and carrys tarders or the whole global economy. But until then, carry pairs are still in bearish bias until rumour is digested.
Yen Fall as Global Stocks Surge
The yen fell versus high-yielding currencies as global stocks rebounded this week. Carry trades came back to the market as investors regained their risk appetite.
The greenback gained as US corporations squared positions to realize profits on financial statements by the end of the month. The euro dipped to lower 1.46 versus the dollar, and the sterling fell to below 2.06.
The euro zone CPI rose at a faster-than-expected rate of 3%, increasing the case for an unchanged rate decision at ECB¡¯s next policy meeting. In the medium term, the euro is more favorable than the dollar in terms of the interest rate outlook.
US personal income rose at 0.2% in October, below the estimate and the previous reading of 0.4%. Personal spending also fell to 0.2%, lower than the expectation of 0.3%. A key inflation measure, core PCE index, remained at a monthly rate of 0.2% as expected. Chicago PMI rose from 49.7 to 52.9 in October, better than the estimate of 50.3.
The situation the Fed faces now is the inflation is contained and the economy is slowing. US futures showed traders are pricing in a 68 percent chance the Fed will cut its interest rates by a quarter-percentage point to 4.25%
Fed Chairman Ben Bernanke said yesterday on the Charlotte Chamber of Commerce meeting that resurgence in financial market in these two weeks dimmed US economic outlook. The dollar was under pressure after his comments.
The six members of the Gulf Cooperation Council may relax their fixed exchange rates to the US dollar at a meeting next Monday.
EURUSD will face interim resistance at 1.4650, followed by 1.4680 and 1.47. Additional ceilings will emerge at 1.4750, backed by 1.4780. Support starts at 1.46, backed by 1.4580, 1.4550 and 1.4520. Subsequent floors are eyed at 1.45.
GBPUSD encounters interim resistance at 2.06, backed by 2.0650 and 2.0680. Subsequent ceilings will emerge at 2.07, followed by 2.0730 and 2.0750. On the downside, support begins at 2.0550, followed by 2.0520 and 2.05. Additional floors are eyed at 2.0470, backed by 2.0450 and 2.04.
USDJPY encounters interim resistance at 111.30, backed by 111.50 and 111.80. Subsequent ceilings will emerge at 112, followed by 112.50 and 113. On the downside, support begins at 111 and 110.80, followed by 110.50. Additional floors are eyed at 110.20, backed by 110 and 109.50.
Carry Trade Continues to Suffer
The carry trade is still unwinding, if not coming to an outright end; the result is that the Yen is belatedly joining the ranks of the rest of the world's major currencies, which have risen tremendously against the Dollar. The reason for the sudden weakness in the carry trade (i.e. Yen strength) is volatility. The US "credit crunch" began to significantly effect US bond and stock market valuations almost four months ago, but the full impact still hasn't been felt. The latest development concerns the quarterly earnings release for Freddie Mac, an American company whose main purpose is to provide liquidity to the US mortgage market, through the buying and selling of mortgage-backed securities. However, Freddie Mac is now bleeding money, and while it is unofficially guaranteed by the federal government, investors are seriously questioning its ability to prop up the ailing market for housing CDOs. And this uncertainty is causing investors to eschew risk, in short, to abandon the carry trade in favor of more traditional forex strategies.
EUR/CHF 1h just closed below the 74.2% fib (1.6330) While 4h chart haven't confirm it yet but probably will. I'm looking at 1.6176 as the target if ever bear momentum increases. Though 1h and 4h chart now is at oversold level, so its hard to tell.
If anyone out there hedging long on EUR/USD against USD/CHF. You may consider cut some losses and hold the remaining, or directly short the EUR/CHF pair if you think it will fall using technical analysis.
Yen Carry Trade: Going Strong or Coming to an End
Yesterday, the Financial Times ran two stories on the Japanese carry trade, painting a seemingly contradictory picture. The first article profiled the rise in the number of retail forex accounts in Japan, projected to reach 1 million by year-end. More amazing is the fact that many of these traders are actually quite sophisticated, taking long and short positions in multiple currencies, though of course the most popular bet remains the carry trade, which involves going short the Yen and long a higher-yielding currency. Meanwhile, as the second article expounded, the Yen carry trade is under pressure, having appreciated nearly 5% against the US Dollar, Euro and Australian Dollar. The cause is certainly volatility in global capital markets, precipitated by what has been termed a "credit crunch," itself caused by the slump in housing prices. The hoard of Japanese retail investors may have to reverse their positions...
Read More: Pressure grows on yen carry trades
Carry Trades Rebound
The dollar's rebound stalled in the Tuesday session, relinquishing the 2.07-level against the British pound as traders jumped back into US equities while propping up the carry trades. The moves in the currency market remain closely linked to risk aversion thus warranting particular attention to any new revelations from the subprime meltdown and global equity bourse moves.
Economic data due out from the US tomorrow will see retail sales, PPI and CPI. It will be important to gauge the impact of the deteriorating housing market on the US consumer to determine the extent of any spillover effects on consumption. Retail sales for October are seen down at 0.2%, while the excluding autos figure is down 0.3%.
The Bank of Japan, as expected, left monetary policy unchanged at 0.5% when it announced the results earlier in the session. The Bank voted 8-1, with BoJ Board member Mizuno voting against the unchanged decision. BoJ Governor Fukui stressed that “if adjustments in the US housing market worsen and negatively affect private consumption and capital investment, the global economy would deteriorate”, which would inevitably be detrimental to Japan’s economy. Further, Fukui said that market adjustments have been within the bank’s assessment, adding that there is no preset schedule for future policy tightening. We continue to expect the BoJ to leave policy unchanged for the remainder of the year and do not anticipate any changes until Q2 2008.
Japan PM Fukuda expressed concern over the yen’s valuation, deeming recent appreciation as too fast and cautioning speculators. Fukuda said the yen’s strength poses a problem for the short-term, adding that any sudden change in exchange rates is undesirable. The jawboning is unlikely to deter speculators from dumping carry trades during periods of heightened risk aversion, the primary source of strength for the yen.
Not a Short Term Strategy
Since the inverse hedge strategy I'm using is highly depends on carrys trades of its crosses. I'm posting this article I gathered from John Jagerson of pfxglobal.
"The carry trade is under attack today but from analysts not prices. Certainly, most carry trade portfolios, including one of my own that I manage, are eating some losses this morning but the press on the issue is extremely negative. It seems counter intuitive to me to assess the health or strength of what is essentially a long term strategy based on short term movements in the market. Additionally, the definition of the "carry trade" as one in which you are simply short the JPY is way to narrow. As the JPY hits all new highs against the USD, it is a good time to think about what this strategy really is and why it works".
"The Carry trade is an opportunity in any market that offers yield differentials between similar assets. In the forex, the GBP/JPY, AUD/JPY or NZD/JPY offer a very wide differential but should not be the definition of this strategy. In the forex alone other currencies like the CHF, SEK and USD, to name three, can play a role in a managed carry trade portfolio. If an investor is actually trying to leverage the difference between yields and play the market's propensity to rise in favor of higher yields, their outlook should be diversified (which the three pairs I listed above are not) and long term. As the market changes the carry trade portfolio should also change but not the strategic concept itself".
As for an update: My portfolio as recovered a bit from a week of drawdown. The bearish moves of eur/chf and gbp/chf has slowed down, which is a good sign that it might reverse from here. EUR/CHF bouncing off its 74.6 fib supports this insight. I'm just waiting for a breakout from this consolidation.
Yen Surges On Risk Aversion
Last week, The yen rose sharply across the board on rising concerns over the credit market. The currency hit a 1 ½ year high at 110.52 versus the dollar. The euro dropped from 166 to just above 162 against the yen, and the sterling slumped 7 big figures to as low as 231.20 versus the yen.
Fed Chairman Bernanke said yesterday in Congressional Testimony that the contraction in housing market may continue to drag the economy and the nation's economic growth is likely to slow down noticeably. His comments raised worries over the housing and credit market, increasing the case for another quarter-percentage point rate cut in December. For fear of further losses in banks from subprime related investments, investors cut back risk appetite and therefore wound the carry trades.
How to take advantage after the carrys unwind? Learn it more HERE!
Dollar Fell on Bernanke Testimony
The dollar slid further across the board after the Fed Chairman Bernanke testified in front of the Congress. The euro hovers just below the 1.47 level against the dollar, while the sterling climbed to as high as 2.1116 versus the dollar. The yen also gained against the dollar from above 113 to a session low at 112.07.
Bernanke today warned that the housing sector conditions may become more severe, increasing worries over the housing and credit issue. He also said the nation¡¯s economic growth may slow noticeably, raising expectations for further rate cut. Interest rate futures showed traders are pricing in an 82 percent chance that the Fed will cut interest rates by a quarter-percentage point in December.
The Euro and sterling remains robust against the dollar after the European Central Bank and the Bank of England left their interest rates unchanged at 4.0% and 5.75% respectively as expected today.
The ECB and BOE postponed rate hikes they planned earlier because of this summer¡¯s global financial market turmoil triggered by US credit crunch. Before the extent of damage from subprime loans related investments are clear, the banks need to keep cautious and do not rush raising rates though the inflation seems to be elevated. In the short term, these two central banks are more likely to keep their benchmark rates unchanged.
While global equity market fell today, investors cut their risk appetite. The yen, as a low yielding currency, benefited from the decline in carry trades.
Yen Eased As Risk Appetite Returned
The yen eased against high yielding currencies as carry trades returned slightly today. Investors regained some risk appetite as US equities market was up for two days. Carry trades will still be the center of the market.
Contagion of Thoughts
The sentiment of carrys unwinding is still building up as of this moment. This has been the topic of all the information sites that I know of.
The Bear Sterns situation That I mentioned last friday, the undervalued Yen, expectations of another rate hike from BOJ, SNB pushes the repo higher last week. All this scares the shit out of me. This is the time I wish I'm not in the market.
What caught my attention is the rise of the bonds price last friday. This indicates that big players are pulling their funds out of the equities and diverting to a more safe investment-bonds. This kind of risk-avert move if continued will cause the carrys to unwind.
Carry trades will inevitably be a very important market focus for this week. Traders will need to be on high alert for comments from G8 finance officials.
Though EUR/CHF is at oversold zone right now, we might see some corrections later. Breaching above friday's highest high of 1.6638 means safe to hedge long. Bounce of the middle channel(pls. refer to the previous post chart) or 38.2 fibo means a continuation of the bear moves.
To focus away from EUR/CHF. Part of my analysis shows a good sign of going long for EUR/USD pair. A hammer candle has just formed on the weekly chart. This is not a recommendation to trade, it is just my observation. Trade it at your own risk.
A recap of today's move. End of 2nd week trade
This is the continues chart (zoom in) I posted earlier. Remember those significant levels I've said earlier? Price roam all of it in a span of 16 hours.
Here's what I did. When the price touched the upper channel and the Stoch, CCI indis crossed down; I open a short (sell) hedge. At 4am EST, there were 2 EUR news announcements followed by ECB President Trichet dovish speech. Both news was negative bias to the Euro, German Ifo Business Climate Index came out 107.0 with expectations of 108.4 and the German Ifo Business Expectations Index came out 102.8 from 104.8 expectations. The news gave eur/chf a whipsaw then fall straight down to the 38.2 fibo. Then afterward drop to the lower channel... made a small correction back to the 38.2 fibo before continues its down move to the 50 fibo. The bear lost steam from there 'til market close of the week. I closed the positions on the third bounce of the lower channel.
To make it short. It was another perfect call.
PMTFC end the week with a total of $3420 equity, and $7357 for TN's account. I know the results this week is not something to hoot and holler, but it is better to end the week with small profits than small lose.
Here are the reasons of the small gained:
- If eur/chf is trending downward, I will only trade with small margin. It is because short hedge position/s is risky with a uptrending carry trade pairs.
- The Fed is pressuring the Chinese government to slow down their fast rising currency. If the yuan makes an impulsive drop, we will see a snowball effect to the global market, just like last Feb-Mar. Related topic here> forex factory
- There is also the subprime mortgage problem going on in the States. Like what happened last February. More of the story here> CNBC
- More of current negative news of EUR. Related topic here> bloomberg
- Japan's possible of a .25bp rate increase, which will tighten the interest rate gaps of major pairs. Related topic here> forex factory
All this will affect the carrys. You can read the CNBC news article yesterday, here CNBC
