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The Day The Yen Carry Trade Died

Tyler Durden's picture

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Wed, 03/16/2011 - 18:01 | 1063525 etrader
etrader's picture

GS's FX desk are upside down is John notes are to be belived....

Wed, 03/16/2011 - 18:11 | 1063594 Yen Cross
Yen Cross's picture


Wed, 03/16/2011 - 18:45 | 1063803 chumbawamba
chumbawamba's picture

Can you say, "Black Swan event"?

I knew you could.

I am Chumbawamba.

Wed, 03/16/2011 - 19:03 | 1063882 egdeh orez
egdeh orez's picture

Ok guys... calm down... this might not be over yet.

We've witnessed many, "can this be it" moments in the last two years.

What if the Japanese fix this "nuclear disaster" in the next 10 days and the Yen starts dropping like a rock?  In that scenario, the carry trade lives on, and it's business as usual (for the fed's printing press, of course).

Wed, 03/16/2011 - 19:25 | 1063959 bankrupt JPM bu...
bankrupt JPM buy silver's picture

didnt know they could clean up radioactivity that quick wow.



Wed, 03/16/2011 - 20:31 | 1064208 Fish Gone Bad
Fish Gone Bad's picture

The internet has really help solve a lot of problems.  Radioactivity isn't one of them though.

Wed, 03/16/2011 - 20:33 | 1064217 Fish Gone Bad
Fish Gone Bad's picture

The internet has really helped to solve a lot of problems.  Radioactivity isn't one of them though.

Wed, 03/16/2011 - 19:26 | 1063963 Goolie
Goolie's picture

It's not about the nuclear issue, it's about rebuilding a country.  Any non-yen denominated assets are being liquidated and the proceeds from those sales are being re-patriated.  Back in 1995 following the Kobe quake, the Yen appreciated 17% over a 3 month period.  Was there a massively large carry trade back then?  I don't know how it compares to today, but this disaster will take far more capital to rebuild.  At some point the Central Bankers in Japan will try and slow down the appreciation...that will probably be an opportunity to add you your long Yen position should you be lucky enough to be long Yen currently.

Wed, 03/16/2011 - 19:46 | 1064034 Infinite QE
Infinite QE's picture

Exactly right. 

Wed, 03/16/2011 - 19:10 | 1063907 CrazyCooter
CrazyCooter's picture

Sorry to camp the top thread, but I think I am not alone in my confusion (I am not a trader/finance guy). I try to dilligently put this type of stuff together on my own, but I don't fully grasp this scenario. Please enlighten/correct me as I am struggling to connect the dots.

The carry trade is a borrow cheap/short term (e.g. the yen because of ZIRP) and lend longer in another currency which has higher rates with the spread being profit.

  • So all these firms out there with such obligations are clearly freaking the fsck out, buying all the yen they can get their hands on, and closing their yen denominated obligations?
  • If so, what is their motivation to do so, as it would seem that Japan is going to devalue if they do anything, making the debts cheaper to repay?
  • Does this mean they have to borrow in something else to replace the yen, such as the dollar?

Any thoughts from professionals/knowledgable parties would be great.




Wed, 03/16/2011 - 19:38 | 1063988 FischerBlack
FischerBlack's picture

Borrow cheap, take risk. That means lend long, buy stocks, RE, commodities, whatever. When it unwinds, it looks a lot like fall 2008. Risk assets all correlate. They don't want to buy back yen, but they have to because they're short and it's going up like a rocket and they get margin calls. So they have to sell the other side of the trade to free up cash to go back to yen. It tanks everything.

Wed, 03/16/2011 - 19:43 | 1064029 CrazyCooter
CrazyCooter's picture

Ok, so the margin call trigger is just a broad based decline or fear of decline in yen denominated assets, which were used as collateral in the carry trade? And once the cycle gets going, its a positive feedback?


Wed, 03/16/2011 - 19:32 | 1063989 steelhead23
steelhead23's picture

Cooter - you really deserve a reply from an FX player, but I'll give it a shot.  Did you notice Tyler's use of the term "margin call?"  Even if a Japanese bank is willing to let you lever your collateral 10 to 1, if the value of your collateral declines (as the dollar is doing relative to the yens you borrowed), they will ask you to meet your collateral obligations to reduce their risk.  So you are going to have to sell assets to meet your obligations - NOW.  Another aspect of this is that the value of a banks assets are currently falling like a rock, so if Bank A needs to raise capital to meet a margin call, its losses could be stunning and if Bank A is sick right now, its going to get sicker.

BTW - I don't know jack about FX, carry-trade, etc. but I do know this - from nuke plants to big banks, risk analysis routinely ignores black swans and I see a flock coming right this way.  Got gold?

Wed, 03/16/2011 - 19:48 | 1064021 CrazyCooter
CrazyCooter's picture

Making this up as I go along here, but ... some hedge fund takes 100 bucks, borrows 1,000 yen at 0% short term, converts the yen into New Zealand dollars, and lends the NZD at 5%.

All made up, but need something to hang my hat on. So the short term yen debt gets rolled into perpetuity and the long term risk is maybe a new convenience store somewhere in New Zealand.

Black swan shows up and does a Pu on the people of Japan.

So this hedge fund gets a margin call on the short term loan (1000Y), forcing the hedge fund to buy yen (lets call it an additional 100Y pushing the collateral from 100Y to 200Y) on the open FX market (like all the other hedge funds in the same boat), driving the price of yen to the moon?

If this is the answer, I guess I just don't understand why the carry trade loans got margin called.



<minor edits to clarify>

Wed, 03/16/2011 - 20:06 | 1064120 Spitzer
Spitzer's picture

I understand your question...

If the NZD 5% is still there, why the margin call ?

Wed, 03/16/2011 - 20:21 | 1064178 CrazyCooter
CrazyCooter's picture

Yeah. I was operating on the assumption that the collateral in the short term debt was the longer term investment.

Maybe that isn't the case?


Wed, 03/16/2011 - 21:02 | 1064372 luckylogger
luckylogger's picture

Here is the deal.

You borrow yen at 0% or v. close and then leverage it 200x. the 5% don't mean shit with this kind of leverage when it goes against you.

invest in something else. If the value of the Yen goes up .5% you have lost ALL of your capital. Not some of it but ALL.

Now you will be margin called way befor that so....... basically it only has to go up .2% to get margin called and then you are out of business. done deal !

Wed, 03/16/2011 - 20:48 | 1064284 THE DORK OF CORK
THE DORK OF CORK's picture

Here's a little secret , sov debt is not debt - its money ( my interpretation yes).

It may appreciate or depreciate in value against Gold but it ain't debt in its truest form - at least it does not have to be.

I think the US could be losing its jewel in the crown here - its India if you will.

If Japan finally says fuck it we are not going to fund global speculation anymore because of its internal crisis and redirects resourses inwards and not be the client manufacturing colony of America and the world then the dollar could be truely fucked.

Remember fiat currencies value depend entirely on their yield potential - as they have already hyperinflated, if this characteristic is lost they are almost worthless.

I think we are watching the final death throws of the dollar here.


Wed, 03/16/2011 - 18:25 | 1063677 Sudden Debt
Sudden Debt's picture

Tomorrow option exeration day will nuke ALL the markets.

People who didn't got out now got it comming.


Today I took a day off, and I bought food that holds for 6 months and enough bottled water for 3 months.

Whenever the radiation starts to move our way, I'm yet again going to stock in extra.

If I'm wrong, we'll be eating canned food for a while :)

And if I'm right, I'll be right.


Somehow, I've got a very very bad feeling about all of this.


Wed, 03/16/2011 - 19:07 | 1063848 Zero Govt
Zero Govt's picture

you're preparing for an asteroid attack presumably, not an economic one!

...as for the radiation it'll be slight for anyone outside Japan and there isn't anything you can do about it (canned food won't help any!)

what must happen is the series of political mistakes made by Japanese politicians are brought to book for this avoidable tragedy... just like they were held to account (cough!) in Washington for the nuclear disasters the US Govt made of US property, US healthcare and US education!!!

i'm sure Barney Frank, who let us not forget 'knows it all' and is the worlds leading expert on property, health and education, is minutes away from telling Japan how to sort out this little nuclear leak 

Wed, 03/16/2011 - 18:27 | 1063681 Henry Chinaski
Henry Chinaski's picture

h/t to Johngaltfla.com for the post title reference.


Wed, 03/16/2011 - 18:31 | 1063713 Tyler Durden
Tyler Durden's picture

With all due respect, all credit goes to Don McLean

Wed, 03/16/2011 - 18:57 | 1063856 Cognitive Dissonance
Wed, 03/16/2011 - 22:51 | 1065019 Arkadaba
Arkadaba's picture

Was wondering how long I would have to read through the comments til someone posted a link ;)

Wed, 03/16/2011 - 19:06 | 1063891 OpenEyes
OpenEyes's picture


Wed, 03/16/2011 - 20:24 | 1064187 In Fed We Trust
In Fed We Trust's picture

Is it in the realm of possible outcomes, that Goldman Sachs planted a bomb in some oil well of the coast of Japan? 

How similar this feels to the oil spill.

I often wonder what the think tanks had "planned" in order to get the world to> the  NEW World Order.  Just connect the dots.

A little imagination goes along way.  Einstein.

Wed, 03/16/2011 - 21:18 | 1064488 robobbob
robobbob's picture

Hey, I'm a full on NWO believer, and I've been trying to correlate Japan with the plan. But even I can't come to terms with Tesla longitudinal wave scalar weapons. of course, you can never be too sure.  Castro and Chavez DID blame the US for the Haiti earthquake. maybe I should pick up some more tin foil from the store JIC.

Wed, 03/16/2011 - 22:19 | 1064850 45north
45north's picture

well I'm going long on tin foil!

Rocheleau said he was influenced by the other accomplice, who believed he was being targeted by "the New World Order" and convinced Rocheleau that microchips had been implanted in his sister's unborn baby.

Read more: http://www.ottawacitizen.com/news/Second+pleads+guilty+robberies/4446560/story.html#ixzz1Gopc401z

Thu, 03/17/2011 - 00:39 | 1065397 rocker
rocker's picture

Wow, I kept asking myself how long it would take to hear someone say Scalar weapons or Haarp. You did it Robobob.

When I searched YouTube on the earthquake I got so many hits back on HAARP I couldn't believe it.  So I read many including this "Dutchsinse guy". Studied some of what he was saying to his crowd. I must say, HAARP is real, what they use if for, I'm not sure. But it does not look like a good thing for the Bankster's or elite's enemies. From what I understand the Banksters do not like Japan because they finance most of their own debt. I am going to Pinch myself again in the morning and ask myself it this whole thing is a dream or something. 

Either way, I am 100% cash in these markets. Why would anybody own stocks now ?!!!?!!!?  Physical PM's only.

P.S. If you think what they say about Haarp being used against Japan is amazing, you should listen to what the conspiracy theorist say about what they have planned for the U.S.  

Wed, 03/16/2011 - 18:01 | 1063527 Michael
Michael's picture

Is this kind of waht it looks like?

Wall Street + Federal Reserve Corporation Theft = World Economic Collapse 


Wed, 03/16/2011 - 18:06 | 1063564 Michael
Michael's picture


My Youtube just went blank! This is the second thought police attack on me this week.

Time to reinstall java and flash player again.

Wed, 03/16/2011 - 18:08 | 1063578 asdasmos
asdasmos's picture

Maybe this?


US military blocks websites for Japan aid effort

 - http://news.theage.com.au/breaking-news-technology/us-military-blocks-we...


Wed, 03/16/2011 - 18:12 | 1063595 -Michelle-
-Michelle-'s picture

Only on its own network.

Wed, 03/16/2011 - 18:17 | 1063634 Michael
Michael's picture

I just reinstalled the adobe flash player and it fixed it.

Wed, 03/16/2011 - 18:25 | 1063671 Michael
Michael's picture

 I know who you junkers are. You can run but you can't hide.

Wed, 03/16/2011 - 18:28 | 1063694 Sudden Debt
Sudden Debt's picture

ppffftt... morons who think it matters.

I see it as a popularity quote :)


Wed, 03/16/2011 - 18:32 | 1063719 asdasmos
asdasmos's picture


William the Bastard will be glad to hear this.

Wed, 03/16/2011 - 20:43 | 1064275 Ident 7777 economy
Ident 7777 economy's picture

Damn! Look at them accumulate! A higher count every time the screen is refreshed!

You've got friends!

Wed, 03/16/2011 - 18:53 | 1063843 Blano
Blano's picture

You way, waaaayyyy overestimate your importance.

Wed, 03/16/2011 - 19:44 | 1064035 Michael
Michael's picture

Importance is relative.

Wed, 03/16/2011 - 18:01 | 1063530 Paul Krugman
Paul Krugman's picture

But Cramer just told me to buy buy buy.

Wed, 03/16/2011 - 18:03 | 1063531 ZeroPower
ZeroPower's picture

Red open on ES and wow

Wed, 03/16/2011 - 18:13 | 1063609 adeptus
adeptus's picture

Excuse my n00b question. ES = ??

Wed, 03/16/2011 - 18:20 | 1063645 adeptus
adeptus's picture

Thanks, "ES" was too short of an acronym to google and get any obvious answers.

Wed, 03/16/2011 - 18:29 | 1063683 ZeroPower
ZeroPower's picture

Its the S&P futures which trade all day/night.

Edit: yup ditto to above

Wed, 03/16/2011 - 18:02 | 1063536 slow_roast
slow_roast's picture

Goldzilla bitchez!

Wed, 03/16/2011 - 19:15 | 1063932 Zero Govt
Zero Govt's picture

Godzilla joined the bailed out Japanese zombie bankers on a flight out of Tokyo last night ...meanwhile the Jap Govt pushes aside safety standards and ask the peasents to risk their lives trying to rectify their political mistake siting nuke plants on the coast ....this is how it works, what a wonderful world

Wed, 03/16/2011 - 18:04 | 1063542 John McCloy
John McCloy's picture

Complacency is a sin. Surely this an oil prices will wipeout Ben's "wealth effect".

Wed, 03/16/2011 - 18:04 | 1063543 tallen
tallen's picture

Might want to look up when you walk past GS/BAC HQs, there's gonna be some falling bankers.

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