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Why the tanking Japanese yen should concern investors: Morning Brief
Yahoo Finance
Why the tanking Japanese yen should concern investors: Morning Brief
Jared Blikre
Thu, March 31, 2022, 6:02 AM
This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Thursday, March 31, 2022
The Bank of Japan (BOJ) was in a bind on Monday. ... Its currency, the yen, was crashing while yields on their government bonds were surging. The solution — four days of unbridled bond buying by the BOJ to stem the hemorrhaging and contain interest rates. While the gambit worked (for now), Wall Street is waking up to this potential canary in the coal mine.
Big moves in the yen are rare, but traders pay attention when the currency starts moving. It's the third most heavily-traded currency, and it's involved in trillions of dollars worth of highly levered trades. Hedge funds try to arbitrage differences in interest rates around the world by borrowing in "cheap" currencies (like the yen) and investing in bonds in higher-yielding countries — the so-called carry trade.
For instance, if 10-year Australian bonds yield 5% while similar Japanese bonds are paying close to nothing, investors can sell the yen, buy the Australian dollar, and use the proceeds to buy Australian bonds. There are lots of moving parts and wonky details, but that's the gist of it. ... But because traders are essentially picking up dimes in front of a bulldozer, these bets are highly levered to maximize returns — which means they can fall apart quickly and cause systemic risk if enough traders are effected.
So when the yen starts making big upward or downward moves, traders face tough decisions. Hedge funds staring down the barrel of multiple margin calls will liquidate good bets — even safe haven assets like gold — to cover their bad bets. This is how contagion works. ... For now, the BOJ's bond buying — effectively printing more money, in this case yen — is supporting easy financial conditions. But if the bank's hand is forced and it abandons the buying, a massive unwinding will likely follow. And no one is currently pricing in this risk.
{snip}
Why the tanking Japanese yen should concern investors: Morning Brief
Jared Blikre
Thu, March 31, 2022, 6:02 AM
This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Thursday, March 31, 2022
The Bank of Japan (BOJ) was in a bind on Monday. ... Its currency, the yen, was crashing while yields on their government bonds were surging. The solution — four days of unbridled bond buying by the BOJ to stem the hemorrhaging and contain interest rates. While the gambit worked (for now), Wall Street is waking up to this potential canary in the coal mine.
Big moves in the yen are rare, but traders pay attention when the currency starts moving. It's the third most heavily-traded currency, and it's involved in trillions of dollars worth of highly levered trades. Hedge funds try to arbitrage differences in interest rates around the world by borrowing in "cheap" currencies (like the yen) and investing in bonds in higher-yielding countries — the so-called carry trade.
For instance, if 10-year Australian bonds yield 5% while similar Japanese bonds are paying close to nothing, investors can sell the yen, buy the Australian dollar, and use the proceeds to buy Australian bonds. There are lots of moving parts and wonky details, but that's the gist of it. ... But because traders are essentially picking up dimes in front of a bulldozer, these bets are highly levered to maximize returns — which means they can fall apart quickly and cause systemic risk if enough traders are effected.
So when the yen starts making big upward or downward moves, traders face tough decisions. Hedge funds staring down the barrel of multiple margin calls will liquidate good bets — even safe haven assets like gold — to cover their bad bets. This is how contagion works. ... For now, the BOJ's bond buying — effectively printing more money, in this case yen — is supporting easy financial conditions. But if the bank's hand is forced and it abandons the buying, a massive unwinding will likely follow. And no one is currently pricing in this risk.
{snip}