Grey power plays the yen long game By David Pilling and David Turner in Tokyo Published: March 7 2007 22:32 | Last updated: March 7 2007 22:32 Excited talk about the catastrophic unwinding of the yen carry trade tends to conjure up images of slick hedge-fund types in Chicago and London frantically squaring their highly leveraged positions. But fortunately for those worried about a massive unwinding of the carry trade, the truth might be rather more mundane. Far from being testosterone-fuelled 20-something traders, those with the most at stake are far more likely to be silver-haired Japanese retirees. And they donât seem to be panicking. By some definitions Japanese investors in their 60s and 70s â who have been venturing abroad in increasing numbers because of low domestic interest rates â do not count as carry traders at all. Rather than borrowing to invest in non-yen assets, they simply transfer yen savings into investment trusts with foreign portfolios or into so-called uridashi bonds, foreign-currency-denominated paper issued in Japan. But the effect is the same. Their transactions have put downward pressure on the yen and upward pressure on the currencies and assets into which their investments flow. Tohru Sasaki, the chief foreign exchange strategist at JPMorgan in Tokyo, says foreign bond investments by Japanese investors account for about Y30,000bn ($258bn, â¬197bn, £134bn) of what he estimates is a total carry trade of Y40,000bn. Pictet Asset Management, a private Swiss bank that is the biggest manager of foreign mutual funds in Japan, says its investors have not been rattled by recent market turbulence. That is because most receive a monthly dividend in yen that is not affected by market volatility, even of the sort that has shaken global markets since last week. âFar from seeing outflows, weâve actually seen inflows at record levels,â says Stephen Barber, Pictetâs group managing director, adding that on one day this week a net Y10bn of investments came in. âIf anything, these retired investors are saying: âItâs cheaper than it was last week. Letâs buy some more.â â Peter Tasker, founding partner of Arcus Investment, a hedge fund, points to a sort of automatic stabiliser that prevents the yen from appreciating too rapidly. As the Japanese currency rises, the temptation grows to put money abroad into now cheaper assets. With overnight rates still at a mere 0.5 per cent â and considerably lower for bank accounts â a relatively small depreciation of the yen can be worth years of domestic interest to the Japanese. That is what seems to have happened in the past few days. The yenâs sudden appreciation, from about Y121 to the dollar last month to near Y115, has stalled. On Wednesday it was back to Y116.35. Ichizo Yamauchi, executive vice-president at Kokusai Asset Management, whose multi-trillion yen _Global Sovereign Bond Fund is the biggest retail investment trust in Japanese history, says that, far from panicking, retail investors are bargain-hunting. They âsaw a big chance to investâ, he says, pointing out that the price of one unit in the fund, which offers a monthly dividend of about Y40, dropped below Y8,000 on Wednesday for the first time since August. Although inflows and outflows from the fund were evenly matched last week, on Tuesday investors put Y3bn more in than they took out, an unusually high figure for a single day. Tomio Nakayama, a 40-something salaried worker living in Tokyo, has not been ruffled by recent events. About three years ago, he put about Y2m into an Australian dollar bank account. Yen accounts at the time were offering a pitiful 0.01 per cent interest rate, making the rate for Australian dollars, then 12 per cent, spectacularly attractive. Since then the Australian dollar has strengthened by about 20 per cent â in spite of recent moves in the opposite direction â giving him an extra windfall. Mr Nakayama is considering taking profits by pulling his money out of Australian dollars. But he is more likely to put the proceeds into US dollars than bring them back to Japan. Yen accounts remain unattractive because âJapanese interest rates are still lowâ, he grumbles. His faith in foreign investments has not been shaken by recent market gyrations. âI donât think the Japanese yen is going to become strong again,â he predicts. The role of private investors is expected to only get bigger. Most of those flocking to seminars touting overseas investment funds these days are âsilver-haired investorsâ seeking higher-yielding funds for part of their retirement nest eggs. Over the next three years, more than 8m retiring baby-boomers stand to receive an estimated Y50,000bn in lump sump retirement payments. If only a small proportion of that money starts to leave Japan, it will provide a powerful counterbalance to any trades that are currently moving in the opposite _direction. Copyright The Financial Times Limited 2007
not true. retail can access this by either a good forex broker who pays interest on currencies, or you can even do it by futures, since cost of carry accrual benefits the holder in lets say the CME jpy contract. and by the way, according to CFTC COT there was a huge unwinding of the futures. something like 35% of the total open interest short covered. JAPANESE YEN - CHICAGO MERCANTILE EXCHANGE Code-097741 Commitments of Traders with Delta-adjusted Options and Futures Combined, March 6, 2007 ------------------------------------------------------------------------------------------------------------------- : Total : Reportable Positions : Nonreportable :---------------------------------------------------------------------------------------- Positions : Open : Non-Commercial : Commercial : Total : : Interest : Long : Short : Spreading: Long : Short : Long : Short : Long : Short ------------------------------------------------------------------------------------------------------------------- : : (CONTRACTS OF JPY 12,500,000) : : : : All : 324,247: 25,633 94,521 23,137 228,969 169,095 277,739 286,753: 46,507 37,494 Old : 324,247: 25,633 94,521 23,137 228,969 169,095 277,739 286,753: 46,507 37,494 Other: 0: 0 0 0 0 0 0 0: 0 0 : : : : : Changes in Commitments from: February 27, 2007 : : -45,281: -5,648 -57,754 1,693 -31,635 14,941 -35,589 -41,119: -9,692 -4,162 : : : : : Percent of Open Interest Represented by Each Category of Trader : All : 100.0: 7.9 29.2 7.1 70.6 52.2 85.7 88.4: 14.3 11.6 Old : 100.0: 7.9 29.2 7.1 70.6 52.2 85.7 88.4: 14.3 11.6 Other: 100.0: 0.0 0.0 0.0 0.0 0.0 0.0 0.0: 0.0 0.0 : : : :# Traders : Number of Traders in Each Category : All : 122: 32 49 26 29 26 76 86: Old : 122: 32 49 26 29 26 76 86: Other: 0: 0 0 0 0 0 0 0: :---------------------------------------------------------------------------------------------------- : Percent of Open Interest Held by the Indicated Number of the Largest Traders : By Gross Position By Net Position : 4 or Less Traders 8 or Less Traders 4 or Less Traders 8 or Less Traders : Long: Short Long Short: Long Short Long Short :---------------------------------------------------------------------------------------------------- All : 48.1 36.9 60.5 50.4 41.3 29.0 50.4 39.6 Old : 48.1 36.9 60.5 50.4 41.3 29.0 50.4 39.6 Other: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 http://www.cftc.gov/dea/options/deacmelof.htm
Do some retail forex brokers not charge and not pay interest? What is so wrong with buying 10 lots that earn 4.5 percent on the leveraged money?
I suppose you could do it through a retail operation but it's not in the same ballpark as what goes on among institutions and hedge funds as the OTC money market offers better interest rates than you get in a retail broker. Eg. a retail trader might sell yen paying 0.5% and get 5.25% on GBP on a daily basis at central bank rates, whereas a bank trader with bloomberg et al could borrow yen at 0.58% over 3 months and lend GBP at 5.51% over 3 months, a far superior carry. The 3 month GBP/JPY rate could be locked with a swap and you just collect the winnings at the end of it. Retail traders are fixed to the base rate and can't work the yield curve by playing the durations. Also retail traders can't do swaps to lock in the fx rates as you would in a bank or hedge fund, coupling unecessary fx price risk to rock bottom yields. Would you really take such depreciated risk/reward on a leveraged account? So a retail trader plays with a MUCH weaker hand and is probably in over his head on the carry trade - not a good idea given a spiking VIX, jitters in EM, mass derisking in equities, wider credit spreads and a rate hike when Jap CPI is zero....enter at your peril. I do trade retail fx a wee bit on the side, a few trades a week, and I like to make money on the volatility caused by closeouts of carry trades eg 2 weeks ago the yen MM was fixing way up at 0.73% and GBP was at a 5.28% down from a 5.32% and it screamed for a short GBP/JPY. This was the best trade I have ever done (514 pips over Fri-Mon period) and made last week for me (I really should've done nothing else after it). I would be pretty happy to play carry trade closeout volatility but would never open a carry trade on my retail account. Very interesting post about the futures unwinding...I will look into it, I can't really comment on futures as I am confined to cash because they are reluctant to pay comish on futures when we can do cash for free (fair enough cos volumes are huge). Our researchers completely missed the futures data, I will rap their hairy knuckles.
can you explain in a little more detail how you can basically lock in on both sides and eliminate currency risk entirely on these time frames? thats doesn't sound right, since if it were possible, everyone and their mother would be leveraging it up to the max (1000%+) and collecting their easy annual 150%+ returns on money. not familar with currency swaps, so if you don't mind, please explain their underlying components (ie short spot jpy, long 90 day note, etc) and how currency risk is entirely alleviated.
the swap is done with say a long position spot or prespot for the near leg. the far leg is a closeout of the near leg at a predetermined price and date. it is basically a forward priced at spot+carry. the advantage is that the price is locked in for maturity so you don't have to worry about volatility or your p/l on the actual fx transaction. it differs from a spot v futures spread trade in that the futures price can move wildly whereas the swap far leg is prix fixe. swaps pips are 0.1 of a normal pip. typically the bid/offer is 5 swap pips (0.5 regular pips) interbank. dealers make money on such small spreads because the size is typically 100m+ everybody and their dog IS doing it. brokers who deal only with institutional clients (like myself) find that they do about 50-100 times the size in swaps as spot or fwd. swaps account for over half of daily global fx volume (933 bn versus 620 odd bn spot and 200 odd bn futures and fwds). the reason it hasn't caught on in retail is because (a) retail traders are always the second last to know (last is journalists) (b) I've never seen a swap for less than 5m and I don't think leverage is really tolerated in the same way (most interbank fx is on 50% margin, can't see anyone breaking much ice with 3% margin, it would not be allowed by credit or market risk units) (c) retail brokers want to churn you for 3 pip spreads, the idea of 2 trades every few month on a 0.5 pip spread is not their cup of tea swaps can also be used to simulate money market O/N positions and the different rates on an O/N swap vs O/N MM can be used to perform a great arbitrage trade. but that's another day and another thread!
thanks for the great info. more supplemental questions: O/N = ? you say: "the far leg is a closeout of the near leg at a predetermined price and date" - what instrument is this contract precisely called? If I'm understanding you correctly this could be synthetically replicated with options + spot (delta neutral position) for usdjpy. of course this limits your gains, but locks the cost of carry benefit. lastly what are the downsides to these swap positions? it sounds like there is zero risk here, including currency movement risk. i'm missing something.
The swap rate is not in any way a predictor of where a currency is heading. It is simply a mathematical reflection of the two respective interest rates. Swap = spot rate x (ir diff/100) x (days/360) âWith tongue in cheek, it could be said that spot dealing in currencies is the preserve of the gambler and speculator, while forward dealing â particularly constructive dealing on oneâs own account â is an activity which gives an intellectual enjoyment to the foreign exchange purist.â Foreign Exchange Dealerâs Handbook: R. G. F. Coninx, Woodhead-Faulkner. 1986 Trading forwards is like watching paint dry. Oanda pays real time interest if you want to carry trade, and you don't have to worry about the roll. o/n = overnight; t/n = tom next s/n = spot next. Spot trades (in most cases) T+2. Tom next is a swap value next business day to spot date; spot next is spot to T+3. Not bad for a journalist who supposedly knows nothing - but then I did trade interbank for 12-years - once a dealer always a dealer.
^^^^^ what he said! The downsides are that a lot of your money is tied up for months doing zilch. also: the biggest downside is that swaps are a pain in the **** to price and book. and because the pip quote is so specific (sometimes it runs into like 8 decimal places in very tight O/N on EM fx) and the amounts and interest rates are fiddly, you often have to call several times before you can get it to match. UBS have a webplatform called FX Trader which has alleviated this somewhat, we used to deal with RBS London via Reuters and they booked half of their swaps wrong and you had to phone a "middle office"/call centre in Singapore to get it booked properly. Nightmare. ABN Amro were just as bad their mid office/call centre people are in India, long live UBS and their no expense spared approach to customer service! You have to ensure that swaps are priced correctly as if it's wrong it won't settle and then you've got an outright position for 400m on GBP/USD which can move overnight and Murphy's Law is that it will go against you. the far leg is simply referred to as the far leg of the swap, it is not a separate instrument - swaps usually show on blotters are one instrument.
No. You can't. Sorry. Not without giving up the very carry you were trying to capture. The interest rate difference is priced into the swap. Not a clue. Not even a small one! You are FOS on this one. Cordially, Dr. Lizardo