Saxo Bank (Saxo Bank)
Markets  |  March 13, 2013 10:25:41

Abenomika or carry trades in your backyard?

John J. Hardy, chief strategist for currency markets, Saxo Bank .


Abenomika new word formed by association name the new Japanese Prime Minister Shinzo Abe and word economy. The essence abenomiky are massive economic injection to revive the Japanese economy, which is in recession.

Carry trades is a form of speculation in the forex (foreign exchange) market:

  1. Form is a short sale (short selling).
  2. Carry trade.

The essence lies in the carry trade investing in foreign exchange rates. When is invested in currencies with high interest rate of that currency is buying currency. Profit from the carry trade is profit from the interest rate component of the currency. Interest currencies is based on the monetary policy of the country is usually the responsibility of the central bank.(Source: Wikipedia )

Abenomika is just another excuse to plunge into carry trades during the constantly changing market. At this moment in the spotlight yen, more so than the U.S. dollar. Notice how jumps will showcase Japanese yen at the next sale of shares.

Short furor over reports of unemployment in the U.S. at the moment employs traders who take trading as a game from Nintendo. But I prefer to look more broadly. Specifically, whether the stage ended the currency market, where tilted in favor of riskier currencies in dormancy and safer in the risk period, or whether the market focused attention on the yen and the dollar stopped noticing. I think it's true or not. In fact, the only other expectations Abenomika auriferous liquidity driven stock markets higher and supports new massive carry trades in Japanese yen. How long can this continue? While this can not be estimated, but we are approaching an important moment.

QE QE1 and QE2 was highly successful in that drove up capital markets, even though it American economy reacted rather sluggishly. QE3 and the second version was launched in December and its end date is unknown. QE3 and QE3 2.0 also driven up the capital markets. Reaction currency market but it was different, because the U.S. dollar ceased to respond hyperactive FED. Why? Fed Managers are increasingly concerned about the unintended consequences of QE, although the main trio of Bernanke, Yellen and Dudley remains firmly seated in the dovish positions.There are also better news about the U.S. economy and a wave of austerity, suggests a certain effort. From a strategic point of view, some long-term investors worry about the process of selecting a new Fed chairman, who will begin sometime in the summer. And even if that is the position he will again compete Ben Bernanke.

For now, I Abenomika not particularly did not impress. Japanese bank balance is constantly growing and increasingly fringe buying Japanese government bonds. While traders can focus on the Japanese bond purchases overtake Japanese banks, much more might get. This move is more or less included in price when the currency pair USDJPY traded above the 95th

Abe may yet in the long run to get what he wants. But I think that the political potion at this point will not work. I think he and the central bank will have to go much further if they want to cuckold inflation and weaken only. Maybe they should try OMF Overtech monetary financing, which is a real waste of money from a helicopter, when the government spends downright printed money instead of money, which are theoretically secured debt. Or the central bank can try to monetize the debt, so that buys government bonds, which then essentially tear.

Here are a few charts to support it, what I continue to speak:

USDJPY vs. yield spreads

In recent years the USDJPY currency pair perfectly mirrored the yield differences. Japanese bonds with the lowest yield followed trendsthe bond markets better than the equity markets and risk assets. Many people look at the ten-year spreads of U.S. and Japanese bonds, and felt that the movement is too steep.

usdjpy Abenomika nebo carry trades z vaší zahrádky?

A closer look

If we look around at the last hundred data points and play a little bit with the axis, we see that whether the motion was exaggerated or not, yet we see that the main direction of yields remains USDJPY currency pair and just generally important. No trader focused on Japanese Yen should start from the graph of bonds eyes.

usd jpy Abenomika nebo carry trades z vaší zahrádky?

And what risk appetite?

Here we see more and more evidence that Abenomika attracted traders on speculation the yen. Only became popular currency for carry trades and risk speculation as QE3 U.S. dollar weaken. A predominant belief that the U.S. economy is finally healed enough that the Fed will eventually hamper the expansion of its balance sheet, or even terminate the end of the year, while the Bank of Japan will continue inflating their balance sheets. So expect more stress on the yen until you tell yourself at risk speculators, that enough was enough.

jpy svetove jmeni Abenomika nebo carry trades z vaší zahrádky?

So here in the first place is an interesting question: What if risk aversion returns? Speculation only weak, without extreme steps such as OMF, but this is real, this means leveraging the trust as well as chasing liquidity in QE1 and QE2. If in the coming weeks and months, the EU again gets in trouble or there is a geopolitical explosion or falling markets in the U.S. based on the belief that the Fed tightens slowly taps, then the yen shot up three times faster than fell. Such things have already happened repeatedly.

Another thing that fascinates me is this: Of course, the weakening of the yen may continue, especially if they continue to grow worldwide income and risk appetite. History shows us that increasing revenues ultimately deliver a mortal blow to shares. But the big question is it eventually. How long will it last?

The main message is this: Play with the Japanese yen means playing with fire, so stay careful and consider whether and how to ensure their positions against adverse moves.

Post Abenomika or carry trades in your backyard? comes from Saxo Bank 24/7

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