The Turkish lira plunged as much as 12% against the yen, forcing Japanese investors to liquidate positions in one of their favorite emerging-market trades for the second time this year. Much of the lira’s Monday sell-off happened about 7:20 a.m. in Tokyo, around when Japanese margin-trading firms typically start closing loss-making client positions. Net lira-yen longs held by margin accounts rose last week to the highest level since mid-June, according to data from the Tokyo Financial Exchange Inc. The drop exacerbated after a tit-for-tat exchange of tariffs by China and the U.S. on Friday spurred a rush for haven assets. Earlier this year too, yield-hungry Japanese retail investors were caught in a flash crash when the yen in January surged against every currency tracked by Bloomberg during the so-called witching hour of the Asian morning. “Margin accounts have recently accumulated lira longs,” said Toshiya Yamauchi, chief manager for foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. “Given the lira’s nature as a high volatility currency, the surge in the yen must have triggered stop-losses this morning.” The lira plunged to a low of 16.1485 against the yen, before paring most of its slide. It traded down 1.3% at 18.0680 as of 3:18 p.m. in Tokyo. The early slide was also echoed in other currency pairs, with the lira dropping as much as 9.9% against the dollar. The Turkish currency was the most actively-traded emerging-market currency by Japanese retail investors in July, with 1.39 trillion yen ($13.2 billion) worth of lira-yen traded that month, according to the latest datafrom the Financial Futures Association of Japan. Japan’s Margin Traders: Why They Matter for Currency Markets Japanese margin-trading firms tend to evaluate their client positions every day, typically around 7 a.m. in Tokyo and liquidate them if losses reach certain levels. As Japanese retail investors are typically thirsty for yield, they tend to accumulate long positions in risk assets, leaving them exposed to a sudden rally in the yen, according to a research paper from the Bank of Japan. Turkey’s central bank started unwinding last year’s interest-rate hikes in July, after President Recep Tayyip Erdogan replaced the bank’s chief for failing to act in line with his expectations for a rate cut. A run on the lira saw the currency lose about a quarter of its value during August last year, tipping the economy into its first technical recession in a decade. — With assistance by Onur Ant
This is what happens when BoJ depresses yield curve too much and too long - a blind hunt for the yield.
It is not the fault of the Boj if the common person in Japan is greedy, like people in most places. High yield means the market sees high risk. Adding To the risk, Turkey is in the Middle East, which is always volatile,
The same thing would probably be almost similarly profitable with most major currencies as shorts given the high yield of TRY. JPY just becomes the currency of choice to be short given it has the lowest yield. Carrying TRY when it has been trending lower for years takes some balls. But it should turn around eventually and become a great trade, random Erdogan risks aside. Better timing than "eventually" is needed though. If you want to blame something, the combo of leverage and greed is it.
Indeed, current TRY weakness has great similarity with Ruble in 2014. I was scared to sell USDRUB at the all-time peak but as time showed it was great trade that I missed. At that time it seemed to me that the Central Bank lost control completely. Good trade requires patience and guts.