CARRY TRADE

[rffrydr]

FT may be all over it but the annual repatriation of Yen is underway:

http://www.bloomberg.com/apps/news?pid=10000101&sid=aVfNZYOnTejI&refer=japan

This should be good for 2% in the Yen WITHOUT shortcovering. Eu/Yen decisively broken. Next up: CRB
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

We can now say the G7 induced Carry adjustment went out with a fizzle. Last day in Yen fiscal year-end balancing and surprising Swiss KOF has the brakes on for now.

Next week it all comes back? With a chinese kicker?
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Push on Carry, both Yen and Swiss is back: triggered by LEND's credit problems no less! The japanese currency SPECULATOR will have been doubled up by now and caught in the gears of his own repatration trend until the beggining of April.

Look for weakening Japanese economy and equity hit coupled with longer-term retail outflows to keep a lid on thiis and bring the carry back yet again over the summer. Looking for pairs to exceed their lows last week. BP weakness in the face of newly hawkish BOE conditions tip off. Hard to buy the yen with that kind of differential working against you....easier to short--
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Sterling shows the hidden Japanese retailer:

The pound stumbles as currency speculators cut back on risk

FOR a currency that ranks third behind the dollar and euro in official foreign exchange holdings, the pound has recently been keeping some louche company. As investors scaled back their risk exposure, the roster of falling currencies contained the usual suspects. The Australian dollar, the New Zealand dollar, the Brazilian real and the Turkish lira were all marked down during the market squalls, particularly against a resurgent yen. It seemed odd, though, that sterling should behave more like those racy high-yielders than a stable reserve currency.

Sterling dropped below $1.92 on March 5th, a low for the year, having traded as high as $1.99 in January. But it was the pound's 7% fall against the yen between February 27th and March 5th--a plunge as big as the Australian dollar's--that raised some eyebrows. Was the thoroughbred pound in fact a beneficiary of the carry trade, the strategy of borrowing cheaply in Swiss francs or Japanese yen to buy higher-yielding currencies?

No one knows precisely how big a role sterling played in such trades. Most market watchers believe that Britain ranks below Australia and New Zealand as a destination for cheap borrowed funds. What is clear, though, is that the weight of speculative bets on the pound, however these trades were funded, made it vulnerable to a correction once the markets started their retreat from risk. Over the past year sterling has become a favourite of currency traders because of Britain's strengthening economy and rising short-term interest rates, according to Adrian Schmidt, a currency strategist at the Royal Bank of Scotland. Acquisitions of British companies by overseas investors have given the pound an extra fillip. Foreign central banks have steadily increased their holdings of sterling, attracted by its high yield and liquid markets.

That kind of official approval is hard to resist, and sterling's upward momentum went unchecked until recently. But for all sterling's attractions, it does not look cheap. The OECD estimates that sterling's purchasing-power parity--the exchange rate that would bring the price of goods and services into line with those of other countries--is $1.62, more than 15% below the pound's low point on March 5th. Like other asset prices, sterling had risen too far, too fast. Its recent stumble is probably no bad thing.

Source Citation: "Bad company; Sterling weakness." The Economist (US) 382.8519 (March 10, 2007)
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

And the breaking of it..... JP Morgan recommended exiting trade today. Specifically NZ cross. Ain't done nothin' to the Aussie....yet.
_________________
Today is the Tomorrow you worried about Yesterday!

[Goodfella]

carry trade is bad for japan. takes investment away ---> enemy china

[rffrydr]

Reports of Banks buying Dollars against Yen presents itself: At-The-Money put spreads of 100bp are going for less than 40bp. Dollar doesn't have to rally, just manage to stay around where you entered for the interest differential to take you home. 60bp profit approx. $720 for less than $500 max risk, two ways to win.

--Only if BOJ can keep a cork in it.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Yen continues "correction." Chart looks solid with three bottoms on a quarterly trend support line. Momentum and trend have both swung in it's direction:

http://www.bloomberg.com/apps/news?pid=20601101&sid=a07p.6OjH6dw&refer=japan

Wantanabee says of unwinding, we ain't seen nothing yet. Estimates 10-20 trillion yen. BOJ buying dollar yen to try to smooth things out. Again, See G7.

Repatriation came and went last year without much effect. Reversion to the mean?

See http://www.marketthoughts.com/forum/yen-at-extremes-t2531.html

(paricularly the Simmon's article on thestreet.com down midway on the first page)
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

1st Test since beginning year. 1st sign of yen repatriation. Early for me, yet simmons (see Yen at Extremes) nailed it. Confirmed in Peso, Rand, Real, Kiwi--not in Australia.

Commodities showing resilence. Alot of folks hanging their hat on that negative beta. For those weary to push the buy button perhaps the double puke will be time to buy.

http://www.dailyfx.com/story/dailyfx_reports/daily_brief/Japanese_Yen_Rallies_on_Unwinding_1172578781313.html
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

The carry as self-fulfilling:

http://www.economist.com/finance/displaystory.cfm?story_id=8742054
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Or something dramatic in the Korean mortgage industry.

Henry

[rffrydr]

Carrying on...as you might expect with all the attention. Last night's dramatically lower swiss inflation numbers spiked this japanese cousin lower in the face of turning sentiment:

http://futures.fxstreet.com/Futures/news/afx/singleNew.asp?menu=economicnews&pv_noticia=1170866090-68aa0f08-35589

As said before may just have to wait the natural year-end repatriation next month--or something dramatic on the Yuan.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Great reveiw of carry 2006 and regressions to boot!

http://www.thestreet.com/_rms/markets/activetraderupdate/10330733.html

BofA backing down on it's forecast:

http://www.bloomberg.com/apps/news?pid=20601101&sid=aQ7vOIau2jEA&refer=japan

Suffice it to say, BOJ "managing" less and less well.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

While everyone's been looking for the investment/speculative consequences if the carry came off--it may be the investments coming off that starting to affect the carry.

Copper and Oil, et. al. may cause a bigger dent than anyone expects.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

On a day when the Euro/Yen is coming off a little (on real news) it's good to review.

Chilean Pesos into Turkish Lira. The new and improved Carry Trade:

Dollar's Tumble
May Hurt Players
In Carry Trade
Weakness Prompts Predictions
Of Global Currency Volatility,
Raising Potential for Losses
By JOANNA SLATER
December 13, 2006; Page C1


The recent weakness in the U.S. dollar is sending tremors through a popular practice in foreign-exchange trading, raising the potential for further instability in global currency markets.

The practice is known as the carry trade: Investors borrow money in a country in which interest rates are near zero, such as Japan, and invest it in a country like New Zealand, where interest rates hover above 7%. The trade works best when currencies involved remain relatively stable -- sharp currency moves can wipe out gains from the difference in interest rates.

Weighing heavily on the dollar recently: expectations the Federal Reserve will reduce interest rates in 2007, making dollar assets less attractive to investors. Yesterday, the Fed left its benchmark short-term rate unchanged.

Already, the U.S. dollar's tumble against the euro is prompting some observers to predict that currency rates around the world will be more volatile going forward. That is bad news for the carry trade and, possibly, for other currencies and some stock markets. The stakes are high: The last time these trades unraveled was in the spring, when investors spooked by the prospect of rising Japanese interest rates abandoned riskier investments in countries from Iceland to Turkey. Stocks in developing countries plummeted, along with some of their currencies. In Iceland, a favorite destination for the carry trade, the country skirted a full-blown financial crisis.

Despite that turmoil, market watchers say the carry trade has proved irresistible, thanks to the continued allure of low-cost borrowing in Japan and elsewhere. "There are a lot of people who still have these trades on," says Paresh Upadhyaya, a portfolio manager at Putnam Investments in Boston. At the same time, he says, "Things are lining up that could unwind them any day now."

One such factor would be fluctuation in currency rates. For most of the past six months, exchange rates for major currencies have remained relatively stable in comparison with prior periods. For carry traders, that has meant they could reap returns from the difference between the interest rates in two countries without worrying that a currency swing will erase their profits -- or worse.

But the recent selloff in the U.S. dollar will lead to larger fluctuations in other currencies, BNP Paribas argued in a recent report, including those low-interest-rate currencies that fund the carry trade, such as the Japanese yen and the Swiss franc. "Carry traders need to be cautious," it warned.

Some market observers believe an unwinding of carry trades can unfold in a gradual way that wouldn't rock markets. Others say experience shows these reversals are rarely an orderly affair.

"Everyone is always looking for the magic signal on how to get out before [the carry trade] unravels," says Richard Clarida, global strategic adviser at Pacific Investment Management Co. and a professor at Columbia University in New York. "Carry trades work until they don't."

Adding to the uncertainty is the fact that no one knows exactly how big the carry trade is.

One indicator of its vigor can be found in the weekly reports from the Chicago Mercantile Exchange on currency futures. Hedge funds and currency speculators use futures positions to mimic the mechanics of the carry trade, since such instruments also reflect the interest-rate differentials between countries.

The most recent CME figures show that while speculators have reduced such trades, they still have substantial short futures positions in the Japanese yen and the Swiss franc -- two currencies commonly used to fund the carry trade -- and considerable long positions in the Australian dollar and the New Zealand dollar, two currencies used to extract profits from the trade. In the currency markets, short positions are agreements to sell a currency on a specified date, while a long position is a purchase order.

Others see the dimensions of the carry trade in data on financial flows in and out of Japan.

In a recent note to clients, Goldman Sachs said the size of the carry trade outstanding involving yen is "substantial" and could account for a large chunk of the country's balance-of-payments surplus, which is 4%-5% of gross domestic product, or the total value of goods and services produced in the nation. If the trade were to unravel, the investment bank said, the yen could strengthen as investors buy the currency to cover their borrowings. On the flip side, the currencies that served as investment vehicles could tumble as investors sell their holdings.

Central banks are paying attention. In November, Bank of Japan Governor Toshihiko Fukui told the Japanese Parliament that there was a big risk that a sharp shift in the country's interest-rate outlook could spark "a rapid unwinding" of yen carry-trade positions and "bring on various distortions."

The reverberations would extend well beyond financial-market players. Regulators in South Korea, for example, are investigating the ballooning number of yen-denominated loans granted by local banks. Lured by the low interest rates attached to such loans, individuals have plowed the proceeds into higher-yielding assets like real estate, spurring fears of a bubble.

Meanwhile, in their constant search for bigger returns, carry traders are starting to focus on currencies in emerging markets, where interest rates can be even higher than in developed countries. Thanks to increasing trading in these markets, traders have become more comfortable borrowing in Chilean pesos and investing that amount in Turkish lira, or borrowing in New Taiwanese dollars and investing in Hungarian forint.

These trades, too, can reverse rapidly, prompting currencies to tumble. If investors were to get spooked as they did earlier this year, the likely losers would be countries with a large current-account deficit, such as South Africa and Hungary, says Mark Farrington, head of currency at Principal Global Investors in London.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

And, lastly, the CPI which turned it all has been revised (way) down:

http://za.today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2006-08-25T115237Z_01_BAN523020_RTRIDST_0_OZABS-MARKETS-FOREX-20060825.XML

Things not going as planned.
_________________
Today is the Tomorrow you worried about Yesterday!