Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Jump on Board the Global Capital Stampede to the Japanese Yen

Currencies / Japanese Yen Nov 09, 2008 - 12:34 PM GMT

By: Money_and_Markets

Currencies

Diamond Rated - Best Financial Markets Analysis ArticleJack Crooks writes: Last year I dedicated several Money and Markets columns solely to my expectations for the Japanese yen carry trade to unwind. But since that trend took a breather in the middle of this year, I haven't been keeping you up to speed.

Let me get you caught up today.


The Yen-Carry Trade …

If you're wondering what the heck the yen-carry trade is, let me grab the brief explanation I used in my August 24, 2007 column

The world's largest hedge funds and the world's richest institutions have been borrowing massive amounts of cheap Japanese money to fund some of the riskiest bets of all time. And now, that whole mountain of debt and risk is starting to crumble.

This is precisely what has helped hedge funds get so rich so quickly. This is the “Big Game” U.S. major banks and Wall Street brokerage firms ran to for what they thought were “easy” profits. With this “yen carry trade,” as it's called, they essentially borrowed money in yen, converted it back to their own currency (e.g. the euro or Hungarian forint), and then used the proceeds to place their big bets.

Right after that column was published, the Japanese yen shot up by roughly 22% over the next five-and-a-half months. And today, I think that even greater profits lie just over the horizon.

In just 5 1/2 months, the Japanese yen gained an impressive 22%.
In just 5½ months, the Japanese yen gained an impressive 22%.

To back up my forecast, understanding the flow of global capital is key.

Global Demand and Global Credit …

I can say with nearly 100% certainty that the theory regarding U.S. decoupling has been completely discredited … at least in this global economic cycle.

No longer do the “bright lights” of the financial media believe that the world's economy can sustain healthy growth when the U.S. economy is cut out of the picture.

I credited a lot of the currency market's price action to the widespread, “consensus belief” that the global economy would be fine as the U.S. puttered out. Yet I was never comfortable ruling out the significance of the United States' $14 TRILLION economy.

My two key reasons:

#1: Dysfunctional Credit Markets Spread Far and Wide

We all know how subprime mortgage-backed securities got the ball rolling for lending in the United States. Now scores of major banks and institutions have either gone belly-up or are currently suffering through tough times.

And in the last few months we've realized just how heavily exposed the rest of the world has become. Not only to bad debts connected to the U.S., but from various other non-performing loans made throughout the globe.

That brings me to my second key reason …

#2: The Biggest Over-Exposure to Bad Debts And Bad Decisions Lies OUTSIDE the U.S.

There's no doubt the subprime/lending crisis is having an adverse effect on the U.S. economy. But when you look at the big picture, the heaviest exposure to vulnerable loans and bad debt exists elsewhere, i.e. outside the United States.

In last Saturday's Money and Markets I talked specifically about how Western Europe and the United Kingdom were heavily exposed to loans made to emerging market economies.

Basically, Europe has bought into the export-centric model of these economies. And now that developed economies are slowing significantly in the face of standstill credit, the export-centric economies are bound to default on loans.

That means Europe's humongous exposure and the myriad of writedowns are going to hurt the underlying currency.

To put this in perspective, European banks' exposure to emerging market loans is roughly six times as large as the United States' exposure to subprime mortgage-backed securities.

What's more, the exposure of the American and Japanese banks to these emerging, export-based economies is minuscule compared to where the super-active European banks sit.

But now you're wondering, how does this come back to the yen-carry trade?

Simple …

Japanese Yen Performance is Centered Largely on Capital Flow

The fact that so many recent assumptions regarding the global economy are now getting dumped on their head means global capital is going to reverse course and return to where it came from.

This dynamic — one of deleveraging and risk-aversion — is what's buoying the U.S. dollar. And it's something that I believe will stick around for quite some time and continue to support a bullish view of the buck.

But it's not only the buck that benefits in this scenario …

Just as so many developed and emerging nations borrowed cheap U.S. dollars to fund growth … they also borrowed cheap Japanese yen.

And now that the currency markets are adjusting to reflect the shifting global economy, many are rushing to repay the loans they've taken out in Japanese yen.

This is a significant trend of unwinding carry trades. And it means a significant appreciation is just around the corner.

Take a look at this chart to get an idea of where the Japanese yen currently stands …

Japanese Yen Daily

The yen has shown a considerable appreciation that corresponded with U.S. dollar strength. The red box on the chart highlights that period.

Recently, however, the yen has put in a sharp pullback. I am not surprised. I've been expecting a U.S. dollar correction.

And naturally, since the yen has been moving closely with the buck, seeing a correction like this in the yen is no big deal.

Except … when you consider the whale of a buying opportunity it's offering up.

There's nothing to say the yen can't go lower here. But if I'm right about the severity of the global financial crisis and economic deterioration, then the Japanese yen — just like the U.S. dollar — is in for a fast and furious ride … upwards!

Best wishes,

Jack

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules