Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Netflix - FAANG a Buy, Sell or Hold?, CME Black Swans Chasing Value in Biotech Stocks - 5th Aug 21
We Will See SPX 4600 In 2021 - 5th Aug 21
Revisiting The Excess Phase Stock Market Peak Pattern - 5th Aug 21
Dramatic Divergence between US and European Stock Markets - 5th Aug 21
Budgie Clipped Wings, How Long Before Flight Feathers Grow Back After Clipping, 4 Week Update - 5th Aug 21
Lisa Su's AMD Stock Price Rockets to the Moon! $200 Target, How to Buy for Under $78 - 4th Aug 21
Gold Jumps for Joy Only to Hit the Ceiling… Hard - 4th Aug 21
Is Wise Really The King of Online Money Transfer Services? - 4th Aug 21
Tips for Investing Your Money in Stocks - The Ultimate Guide - 4th Aug 21
Gold is the Key to Financial Wisdom - 4th Aug 21
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Japanese Yen Forecast - The Yen Carry Trade: Global Removal of Liquidity and Deflation

Currencies / Japanese Yen Mar 11, 2007 - 08:55 AM GMT

By: Francois_Soto

Currencies How does the carry trade work?
It's actually very simple. Here is a fictive example from Wikipedia depicting the process:

Bank ABC is borrowing X billions of Yen at 0.0% interest rate in Japan.
Bank ABC is converting X billions of Yen in $USD.
Bank ABC is investing the amount of $USD at 4.5% interest rate in USA with 10x leverage.
Bank ABC profit is (4.5%-0.0%) * 10 = 45.0%

Seems too good to be true! What is the catch?
If the Yen appreciates in value vs. the $USD, Bank ABC may lose a significant amount of money.

So is the Yen going to appreciate then?
As Japan is recovering from deflation, the BOJ might get to start raising the interest rates. Raising the interest rates is adding more pressure for the currency to appreciate.

The last economic data does not favor an increase of interest rate by the BOJ!
Yes but the Bank of Japan doesn't even have to start increasing the interest rate for the carry trade to fall apart. The carry trade is also a very large psychological game in the sense it is self sustaining due to the behaviour of market participants.

As long as traders and banks keep shorting the Yen and depreciating its value, the carry trade is still going to live. It will only take one large player to panic that everyone will rush at the exit and buy Yen before losses become unbearable.

Can this psychological game be described technically with the chart of the Yen?
Absolutely. Take a look at the Japanese Yen chart below. You will notice a very large triangle that began in 1995 up to today. This triangle represents the battle between longs and shorts in a Japanese deflationnary environment with decreasing volatility overtime.

Yes I notice this. What about the Elliott Wave Count?
The Yen now completed secondary (E) of primary [E] of cycle IV since the middle of February 2007. The Yen is now ready to appreciate significantly and exit the triangle. Over the last weeks, we can feel that market participants are getting more nervous regarding the Yen and we believe the panic should ensue very soon. We can expect the Yen to appreciate at the very minimum to its high of 120 made in 1995.

What would happen then?
Market participants who participated in the carry trade will get burned after playing with this fire for so long. By rushing to the exit, the losses will amplify and it would not be surprising to see financial institutions and banks go bankrupt like LTMC in 1998.

Moreover, it may be the beginning of the end for the extremely large credit bubble that fueled all the bubbles we encountered in the last decade: notably the tech bubble, the housing bubble, the commodity bubble and the emerging countries bubble. Why? Because it is estimated the carry trade added more than $1 trillion of liquidity in the world markets.

Does it mean deflation is around the corner?
Yes possibly. The global markets are going to fall in the case of a potential deflationary environment as liquidity is getting removed. This would be a reverse to the mean situation and the burst of a large scale and unmatched credit bubble. We are gradually moving from an expansion to preservation of capital environment.

The social mood is shifting to fear. Creditors are becoming fearful. We can feel this just with the recent sub prime mortgage issue in the United States. Banks and other financial institutions are making it harder to borrow money for mortgage.

This contagion may eventually touch companies to finally attain the consumers. The deflation would then cause the $USD to spiral down to uncharted territories. However it still too early to declare something like this would occur but the scenario is here to get prepared if it would happen.

Are bonds going to be safe in this scenario?
The credit crunch is usually starting with junk debt and climbing up to quality debt. In the short term, this means flight to quality bonds but quality bonds would fall in the long term as even government bonds may default. For the moment, we are seeing more of that flight to quality phenomenom and issues with junk debt.

What about gold?
Gold price is expected to fall in a fiat money deflationary environment because it may not be recognized as a method of payment until some point in the future and because gold holders will have to sell their gold to meet financial obligations. In our current system gold is an instrument to protect from inflation but not deflation.


By Francois Soto, President
EMphase Finance

© EMphase Finance. All rights reserved.
EMphase Finance strives to become one of the most important website in North America concerning fundamental analysis using traditionnal quantitative and technical analysis based on the Elliott Wave Principle. The website will contain detailed analysises concerning specific companies, commodities and indexes along with educational content.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


30 Dec 08, 01:46
Yen / usd

why the yen remain so strong and the economy in japan is

so weak......?

are speculators the reason ?

Thank You

Post Comment

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