Anyone else wondering about the yen carry trades?

Discussion in 'Trading' started by Riskmanager, Mar 3, 2007.

  1. This week was unusual from several points of view. A friend of mine, an energy traders here in Europe who primarily trades electricity, told me that they also experienced some very unsual volatility. If this is also related to the reported yen carry trades, this could become serious.

    Dollar/Yen dropped like crazy, as did Euro/Yen. If the Bank of Japan served as a major source of credit as it seems, this could result into not just an equities bear market, but a widespread one going through many even uncorrelated asset classes instead.

    If you review the commodities charts from this week, you'll see that we had a high correllation with stocks. Oil up, stocks down Vs. Oil down, stocks up didn't work very well this week.
    This was about major playery pulling their yens out of the U.S. rather than shifting their bets from one asset class to another. And if global macro hedge funds were the source of this liquidity dry out, and if the BOJ soon declares that the party is over, we're talking about a possible huge liquidity dry out.

    Any opinions?
  2. For the last three years volatility has fallen. Measures of risk like corporate bond spreads have fallen. Money has been cheap. hedge funds have proliferated, their assets have risen. They are all in the same trade. Buy risk, sell volatility. They've borrowed cheap in yen and Swiss franc and gone long everything else. Volatility is mean reverting. Volatility is the enemy of carry traders. Volatility is going back up. The carry trade is unwinding.
  3. oh, and correlations all go to one when the market panics.
  4. Very interesting, thanks!
  5. An interesting quote from this week's Economist magazine:

    Investment banks use “value-at-risk” models which mean that, when volatility rises, they cut the capital they allocate to trading. This usually means selling assets. So a sudden jump in volatility tends to generate further volatility. “The sell-off was merely a warning shot,” says Chris Watling of Longview Economics, a strategist who recently forecast a correction. “Investors should expect further selling in coming weeks.” What matters is how many actors have all made the same bet. One of the oldest market mistakes is the assumption that you can get out of a position as easily as you entered into it. According to Goldman Sachs, the latest jump in the Vix (a measure of stockmarket volatility) took it eight standard deviations from its average. If conventional models are correct, such an event should not have happened in the history of the known universe. Then again, the move in energy prices that caused the collapse last year of Amaranth, the hedge fund, was a nine standard-deviation event. Perhaps modellers do not know the universe as well as they would like to think.
  6. The Japanese “carry” trade is unwinding and Japan is repatriating assets out of the US back to Japan in the month of March which is their fiscal year end.
  7. Sponger


    This is a repeat comment, but this thread is the perfect place for it - all the computer modeling in the world is worthless when counterparties in derivatives trades reneg on their agreements. All it takes is one player going under, and a potential dominoe effect could occur. LTCM was one firm, and the Fed and Wall Street came to the rescue to save the whole game from a systemic meltdown.

    With all of the hedge funds now in existence, LTCM could very well look like a picnic compared to what could come our way. The saying is the time to buy is when blood is running in the streets - I don't think the streets are even close to running red.

    But then again, what do I know - I'm a bear of very little brain :p
  8. What's this? Intelligent and considered posts from rwo? Apologies for calling you dim before. :p

    These risk protection models don't seem to be based in reality. It's those macro-quants again...
  9. This homogenity in risk management models reminds me of the problem with monocultures in agriculture.

    It may work very well for a while, to plant the same crop all over the place, but once a new parasite finds a niche fo feed off specifically that crop, disaster is much more harmful than it would have been in an environment of mixed plants.

    By reducing risk on a micro level, the major players have actually made the entire market become more instable due to their identical use of the same risk valuation techniques. Crazy.
  10. IMO
    This next 2-3 months
    usd/jpy will correct to 122 area (slow)
    but will drop again to lower then 116
    another correction 200 points
    then down to 112
    it's revisiting 102
    maybe in the same lenght of time as it got to 122 from 102
    #10     Mar 4, 2007