Yen Carry Trade Bust up?

[jamarlin3]

http://detachedtrader.com/

We Remain Bullush on Yen: Looking for Carry Trade Bust Up

"YOU GO UP THE STAIRS AND DOWN THE ELEVATOR"

HSBC Analyst David Bloom on Carry Trade Carnage from players running for the exits at the same time

HSBC's David Bloom

On February 19 in Market Preview for The Week-FOMC Minutes in Focus The Detached Trader published our bullishness on Yen and a short summary of why we think traders will be rewarded handsomely trading Yen from the long side in 2006.

We wrote:

"Going into the week, I will be focusing on the Yen pairs, especially cable/yen. I see big opportunities in 2006 to trade Yen from the long side with increasing fundamentals as proven last week with relatively robust GDP growth which came in five times faster than the US with growth in consumer spending doubling in the quarter.

In addition to improving fundamentals in Japan, The Yuan is silently hitting new highs while few notice. I expect further appreciation in the Yuan to underpin Yen in 2006. If that wasn't enough to develop an appetite to trade the Yen from the long side, there is talk of the easy money policy in Japan coming to an end."

Although Yen has many positive developments going for the pair, the dynamic that we are most bullish about is a carry trade bust up. We believe this year, players soaked into the Yen carry trade will be forced to run for the exits at the same time and some serious carnage will be done in dollar/yen and the Yen crosses. On March 8th, we published our math of how we get to a sub 100 dollar/yen:

(1)End of easy money policy+ (2)higher rates+(3)yuan moves+(4)carry trade collapse=sub 100 dollar/yen.

We now add an end to the Fed tightening cycle and possible rate cuts in the US by the end of the year so the math is now:

(1)End of easy money policy+ (2)higher rates+(3)yuan moves+(4)carry trade collapse+(5) US Fed halting rate hikes and rate cut in US before end of year =sub 100 dollar/yen.

The potential explosion of the carry trade is a dynamic that few are taking seriously and this will likely lead to aggressive gains for Yen. Our appetite remains to be "picky" on our entries and trade Yen from the long side while not marrying the idea of Yen bullishness.

Good articles on Carry Trade Risk/ Warnings

[birdjaguar]

You have a very good case here; however after the carnage, people will still look to take advantage of the interest rate differential while going up the stairs. As long as stops are in place to keep one from going down the elevator, it should not be a killer. For those positions traders who don't use stops, trouble may be brewing.

It is difficult to trade JPY from the long side because the daily interest cost takes so much of your profit. If you can catch the best trades just before the elevator drops, then much of the interest expense can be avoided. I am not that good. I trade it from both sides. Thanks for the heads up anyway. No one knows where the market will go, but you are likely correct in your analysis of Yen strength. It is certainly something to be very careful with this year. Happy trading!