Shanghai stock market CRASH

[DaShi]

Originally posted by Tingkai


Like I said, only a fool would believe...

You seem to be under the impression that what you say has value. I believe that my first post covered that.


Or more fun. Let's use Tingkai logic. I say that anyone who calls himself Tingkai is a fool.

This is getting so easy it's sad.

[pchang]

Real Carry Trade Analysis

Originally posted by DanS
Thought the following WSJ primer of the Yen-Dollar carry trade was interesting reading.

That analysis missed out one one huge fundamental change:

That article only sites the expectation of increased volatility. Yen has gained 4% on USD in the last several months or so. Conservative carry trade could get you 5.25% (US) - 0.5% (JP) = 4.75% almost guaranteed return. But, with the currency change of 4% - that 4.75% drops to 0.75%. That is a huge difference and I can't understand why the article doesn't even mention it.

[Kidlicious]

The Yen has been weakening though lately though, right? It's the expectations that matter.

[pchang]

it just went up yesterday

expectations do matter and the expectation is for the yen to continue gaining against the USD

[Dauphin]

Re: Real Carry Trade Analysis

Originally posted by pchang


That analysis missed out one one huge fundamental change:

That article only sites the expectation of increased volatility. Yen has gained 4% on USD in the last several months or so. Conservative carry trade could get you 5.25% (US) - 0.5% (JP) = 4.75% almost guaranteed return. But, with the currency change of 4% - that 4.75% drops to 0.75%. That is a huge difference and I can't understand why the article doesn't even mention it.

I'm a bit surprised too as I thought it was a fairly basic (or simplistic) theory that long term currency exchange rates can be predicted based on long term interest rates (or inflation for that matter).

[Kidlicious]

Re: it just went up yesterday

Originally posted by pchang
expectations do matter and the expectation is for the yen to continue gaining against the USD

Ok, I see that the Yen is expected to fall to 110/$US. One would expect that to hurt the carry trade quite a bit.

[Kidlicious]

Re: Re: Real Carry Trade Analysis

Originally posted by Dauphin


I'm a bit surprised too as I thought it was a fairly basic (or simplistic) theory that long term currency exchange rates can be predicted based on long term interest rates (or inflation for that matter).

That's what makes this dangerous. Investors aren't perceiving that to hold true.

[DanS]

Re: Real Carry Trade Analysis

Originally posted by pchang
That analysis missed out one one huge fundamental change:

That article only sites the expectation of increased volatility. Yen has gained 4% on USD in the last several months or so. Conservative carry trade could get you 5.25% (US) - 0.5% (JP) = 4.75% almost guaranteed return. But, with the currency change of 4% - that 4.75% drops to 0.75%. That is a huge difference and I can't understand why the article doesn't even mention it.

To be fair, the Yen was stronger than now as recently as December, and is only a little more than a percent stronger than on the year-ago date.

[Tingkai]

Re: Real Carry Trade Analysis

Originally posted by pchang
That analysis missed out one one huge fundamental change:
That article only sites the expectation of increased volatility. Yen has gained 4% on USD in the last several months or so.

The strengthening of the yen only occurred in late February. Before that it was weakening.

The yen went from $1=119 yen in October, strengthened to $116 in December, weakened to 122 in Feb and strengthened to $116, which is where it was at three months ago and six months ago. In the past year, the Yen strengthened from 118 to the dollar to 116 to the dollar, a 1.7% increase over one year.

[Tingkai]

Re: Re: it just went up yesterday

Originally posted by Kidicious


Ok, I see that the Yen is expected to fall to 110/$US. One would expect that to hurt the carry trade quite a bit.

The interesting thing is that if the carry traders believe that the yen will strengthen, they'll want to cash out their U.S. dollars to buy yen so that they can pay off their yen loan. This result in a self-fulfilling prophecy: The demand for yen increases, leading to a stronger yen.

[Tingkai]

Originally posted by Colon™
Unbelievable

Indeed, something like 12 out of 14 ibank economists surveyed by Bloomberg called it wrong at the start of 2006.

[Kidlicious]

Re: Re: Re: it just went up yesterday

Originally posted by Tingkai


The interesting thing is that if the carry traders believe that the yen will strengthen, they'll want to cash out their U.S. dollars to buy yen so that they can pay off their yen loan. This result in a self-fulfilling prophecy: The demand for yen increases, leading to a stronger yen.

Yes, but then I guess the BoJ tries to keep the Yen low so this won't happen.

[Kidlicious]

I think this really locks in Japan into their current economic strategy, and prevents them from creating a stronger domestic economy.

[Tingkai]

Yeah, I doubt they'll let it go below 110, particularly as Abe is low in the opinion polls. If it gets too strong, it'll hurt their exports.

It may even hover around 116 again as traders start betting on when the Japanese government will intervene.

But I wouldn't bet on it.

[Kidlicious]

Another thing is that I read that the people who pay for this is the Japanese savers. I guess the whole thing is held up by them not spending their money.