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In Asia: Black Monday
If you were wondering whether the selling was over -- whether last week's risk-off tone was poised to dissipate -- the answer on Monday in Asia was an emphatic "no."
I won't bury the lede: Monday, August 5, 2024 was one of the worst days in history for Japanese equities.
Recall that local shares were coming off a very tough session on Friday when the Topix dove 6%, capping a $600 billion wipeout on the heels of the Bank of Japan's second rate hike of 2024. If you thought that was bad, you had
Are there any ways to measure the importance of the carry trade in the overall leverage our financial system takes advantage of?
Good question.
Exhibit One is the large weakening movement in the Mexican Peso over the last few days as carry trades funded by short Yen positions are stopped out.
It’s been a while since we’ve seen the poor carry traders but through the wringer like this. It’s so sad – the Fed should step in and do something to shield them from further losses!
I’m feeling nostalgia for Mr. Kuroda !! Was any benefit from raising the Japanese rate 15 basis points worth all this capital destruction and loss of confidence in the markets.
Cuts are coming. How much, how soon? If credit markets close, it will be immediate. Otherwise I believe the fomc waits. It looks like we will be getting 100 bps between now and year end.
Looks like margin call time here in the U.S. as well.
Possibly one could use money flow in each asset class in the last couple days to estimate the size and allocation of the JPY/USD carry trade. Someone like McElligott could, anyway.
The apparent allocation to risky assets like Bitcoin and equities is a surprise to me. I thought of the carry trade as interest rate arbitrage, not as cross-border margin trading. As such I thought the main target of the carry trade was shorter duration fixed income.
The tanking of Japanese equities is also a surprise to me. How is that related to JPY/USD carry unwind?
I’m curious who the lenders are for the carry trade. With carry traders out (for now), those lenders need to find other borrowers or investments. Given the apparent size of the carry trade, that’s a lot of capital looking for a home.
In many cases the masers of the universe raise funds by selling short a “funding currency” and use the proceeds to buy a currency sporting a higher yield, such as the Mexican Peso. It’s a self-funding utopia! Until something goes wrong.
Enjoying your vacation?
Ah so, carry is the vehicle to raise funds and the ultimate profits are made in risky assets, rather than carry being the ultimate profit vehicle? Sounds greedy.
Does this reach back to Japanese equities? Seems circular to sell JPY, buy USD, sell USD, buy Japanese equity.
How goes vacation – other than inconvenient timing, starting out fine. Trying to switch my headspace back and forth between OMFG! to nature drawing.
I’m just referring to early versions of the carry trade which I witnessed first hand. Sell the low yielding currency to fund purchases of higher yielding currencies. Some may use the proceeds to but shorter-term debt.
It’s not terribly different from selling a stock short and using the money raised to buy another – a classic pairs trade.
So, not sure how much spillover there was to Japanese shares. I sense that we enjoyed a tidal wave of buying there by dedicated Asia-Pacific fund managers who bailed out of “uninvestable” Chinese shares and bought India and then Japan. Thanks to their mandates, they did not have the leeway to just sell China and park the cash.
PS – when you are drawing, think about how much more beautiful the scene would be if a developer came in and built a nice complex of condos and time shares there!
The iron coffin lid remains undefeated.