Gary Brode of Deep Knowledge Investing and Robb Fahrion of Flying V Group discuss the 5 Things to Know in Investing This Week: The We Don’t Have Your Data Issue
-The Japan carry trade starts to unwind. There is more to go.
DKI Summary:
Since the bursting of Japan's asset price bubble in the 1990s, the Bank of Japan (BoJ) has implemented extreme measures to combat deflationary pressures. As the first central bank to introduce Quantitative Easing (QE) in 2001 and later Qualitative and Quantitative Easing (QQE) with various asset classes, the BoJ also implemented Yield Curve Control (YCC) in 2016. By maintaining rates at zero or below, the BoJ opened opportunities for the carry trade.
The exact size of the carry trade is unknown, but recent market disruptions suggest it is substantial. To defend the yen's decline, the BoJ raised rates to 0.25%, marking a 35-basis point hike over four months, the largest increase since 2007. This rate hike impacted investors using the yen as the funding currency for the carry trade, forcing them to cover their positions by liquidating foreign assets. A podcast featuring @Peruvian_Bull and @acrossthespread revealed that both institutional and retail investors partake in the carry trade, with retail investors taking out yen loans to invest overseas via brokerage accounts. As the BoJ raised rates, we witnessed significant market declines.
DKI Takeaway:
Recent comments from the BoJ and their efforts to stabilize the market suggest that the current rate levels may be unsustainable. Additionally, anticipated rate cuts from the Federal Reserve in September are likely to narrow the spread for the carry trade, causing further unwinding of positions and pressuring US markets. It is likely the BoJ will keep its finger on the button threatening to hike again and causing deliberate uncertainty for the traders currently short the yen.
Your links:
This week's written version of the 5 Things with graphs:
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Flying V Group: [ Ссылка ]
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