Saturday, July 12, 2008 0 comments ++[ CLICK TO COMMENT ]++

Has Everyone Forgotten About the Yen Carry-trade?

The Yen carry-trade, which used to make the news a few years ago, seems to have been forgotten by many. The carry-trade is still alive and will be so until interest rates in Japan go up and/or investing within Japan becomes more attractive than overseas. Contrary to the popular view of hedge funds being the big players in the carry trade, my opinion is that the carry trade is due to local Japanese investors investing overseas. I have posted articles about this point in the past but to recap, Japanese investments are so unattractive that locals (mostly Japanese women supposedly) invest overseas. I ran across a post by Schreyer at GaveKal's forum examining the relationship between the Yen carry-trade and stocks. Schreyer provides the chart below showing MSCI World stock index versus Euro/Yen currency cross:

Although this is a short-term covering only 2 or 3 years, it does provide a quick glance of the relationship between the Yen carry-trade and stock market investments. Both stocks and the Euro/Yen have moved together in perfect tandem for a few years now; but the relationship seems to have broken down this year, after the stock markets of the world started correcting sharply.

One of the hypotheses was that capital (via the carry trade) is being funnelled into some other asset such as commodities. Will Denyer of Gavekal takes a stab this idea and provides the following chart of the Euro/Yen cross and some Euro oil index. I'm not familiar with the oil index being plotted, and not entirely sure if it is a crude oil index (i.e. commodity itself) or some sort of index of oil shares.

Again, the chart is very short-term and one should draw any strong conclusions from it. Nevertheless, it does seem like the Euro/Yen rate has been moving in lock-step with the oil index lately.

People had been accusing speculators of driving up the oil price. I personally don't think speculation is the main reason (my view is it is based mostly on demand at the margin from developing countries) but if you had to pin the blame on a speculator, I think we have found our speculator. No, it's not some hedge fund or some pension fund overloading on commodities. Nope. It's the evil Japanese carry-trade investors hell-bent on finding higher returns than at home ;) On a serious note, the time frame is too short and I have no idea how much the Yen carry-trade is contributing to the commodities boom. We'll just have to wait and see.


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