[movermike] movermike: The Carry Trade Is In Trouble

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Posted by movermike:
The Carry Trade Is In Trouble 
http://www.movermike.com/posts/1187215580.shtml


   The Japanese Yen violated key supports again. The first support levels
   mentioned on [1]Monday were 118 for the USD

   [dd2559ff03eddc513bcbdc68bc19e0c3.png]

   and 160 for The Euro.

   [bd164d4636a18899e1c0dee0194d6c6e.png]

   Those were broken, now two more key support levels were broken. The
   Yen closed below key support at 116.60, closing at 116.490 to the USD
   and key support at 157 to the Euro, closing at 156.410.

   [2]From FX*words

     To become a successful carry trader, understanding the role that
     interest rates play in the FX market is a crucial task. A country
     offering high interest rates will attract more capital as investors
     seek to capitalize higher returns. As interest rates rise,
     investment will follow, which can in turn increase the value of the
     currency. Carry trader's main focus becomes the expectation on the
     direction of a country's interest rate, to ensure their high rate
     of return.

   Something has spooked the carry trade. The Yen is rising not falling
   against the USD and the Euro, even though our interest rates haven't
   changed. Maybe there's anticipation of our rates falling or maybe they
   feel that both the Euro and USD are on the verge of more debasement of
   the currencies.

   In a follow up email from Adrian Douglas he writes:

     Defaults, bail-outs, liquidity injections, and lower interest rates
     are ALL inflationary NOT deflationary. The legendary Bernanke
     Helicopters dropping dollars out of the sky so that âsomethingâ
     keeps circulating in the economy instead of seizing up in one
     massive debt default is default under a different name. Under
     chronic default creditors are repaid NOTHING, under chronic
     bail-out scenarios with massive liquidity injections creditors are
     paid SOMETHING of almost no value. The end result is the same but
     inflation and hyperinflation is always the preferred political
     route because the sacrificial lambs can be selectively chosen and
     the favored elitists can be rescued by allowing them to have funny
     money they can use to buy the appropriate assets that will maintain
     or increase purchasing power and wealth.

   If I were short Yen and Long the USD, the spread is 5% less slippage.
   I'm a loser if the USD falls more than 5%. In three days the Euro and
   USD have fallen almost 1% against the Yen! Something out there is
   causing big worry.

   [3]MoneyWeek wrote:

     The biggest risk is generally that the exchange rate moves against
     you â the higher-interest rate currency rapidly devalues, reducing
     the value of your assets relative to your borrowing. That's why
     these trades are often described as âpicking up nickels in front of
     a steamroller

   And if you were a speculator, and utilized the Carry trade, where
   would you be putting your money. Mot satisfied with 5% you might
   leverage up or put your money into those fancy tranches of toxic waste
   that got a AAA rating through S&P and Moody's alchemy.So what might
   cause the carry trade to unwind?

     Dresdner Kleinwort strategist Albert Edwards: Plenty of carry trade
     money has flowed into risky cyclical assets. As we head into the
     economic slowdown, these assets are likely to fall in value. As a
     result, speculators in them will cut their losses, bail out and
     repay their yen debts.

   [4]Japanese Yen Carry Trade [5]Forex [6]Mover Mike

References

   1. http://movermike.powerblogs.com/posts/1187069244.shtml
   2. http://www.fxwords.com/c/carry-trade.html
   3. http://www.moneyweek.com/file/20635/why-is-the-carry-trade-so-dangerous.html
   4. http://technorati.com/tag/Japanese+Yen+Carry+Trade
   5. http://technorati.com/tag/Forex
   6. http://technorati.com/tag/Mover+Mike