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Quantifying The USD-JPY Carry Trade Ratio Following Australia's Interest Rate Announcement

Tyler Durden's picture




 

The earlier announcement of a 25 bps rate hike by the RBA was not a big surprise. What was, however, was the knee-jerk reaction by both the USD and the JPY, and specifically the relative sizes of said jerk. As both currencies are funding currencies to AUD longs, the relative reactions provide a good, if crude, way to quantify the relative concentration of shorts in any given currencies (USD and JPY). Then again, it may merely indicate that tonight's USD-trading night shift at Goldman had much more Red Bull than the OZ one. In either way, both the initial knee jerk reaction as well as the subsequent follow through, indicate a roughly 50-100% greater concentration of dollar than yen-based shorts: in other words: the carry ratio funded in USD and JPY is between 2:1 and 3:2.

Chart 1 below presents the relative reaction following the immediate announcement (aka the kneejerk). The drop in the Yen was -0.2% compared to the dollar's -0.4%.

Chart 2 presents the stabilized follow through. While the Yen was still at -0.2%, the dollar had tapered off to -0.3%.

A 50-100% greater carry funding in USD vs JPY would not be surprising, especially since the dollar is backed entirely by rapidly deflating housing assets. However, any announcement by the BOJ that would even hint the country is adopting QE, and expect the carry ratio to shift significantly back in the traditional, Yen-based, direction.

 

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Tue, 12/01/2009 - 00:17 | 147219 phaesed
phaesed's picture

The knee jerk ain't over if the BOJ is set to go QE... damn what other banks are making announcements soon? Tomorrow is gonna be a tough one for GS to float and distribute all day to exit on VWAP by the close.

Tue, 12/01/2009 - 09:18 | 147487 Anonymous
Anonymous's picture

All hot money goes to Australia?

Tue, 12/01/2009 - 00:22 | 147225 lizzy36
lizzy36's picture

Not sure, in this context, if knee-jerk is much different than circle jerk.

Tue, 12/01/2009 - 00:27 | 147231 RobotTrader
RobotTrader's picture

 

 

 

Tue, 12/01/2009 - 00:37 | 147240 Pinkfleud
Pinkfleud's picture

Thanks RT for the bedtime story ;- )

Tue, 12/01/2009 - 01:27 | 147282 Cursive
Cursive's picture

I know it's been said before, but when a market becomes this predictable and detached from fundamentals, the end will be messy.  Blankfein's background is J. Aron, a commodities trading firm.  That sums up the extent of GS right now.

Tue, 12/01/2009 - 01:31 | 147287 Anonymous
Anonymous's picture

she is a gorgeous peice of flesh, but shouldnt a Japanese girl accompany the Japanese Equity Index?

Tue, 12/01/2009 - 02:49 | 147346 faustian bargain
faustian bargain's picture

Was kindof hoping for someone a little more...Japanese.

Tue, 12/01/2009 - 05:23 | 147435 DalFin
DalFin's picture

Robotrader rock!   ZH isn't bad, either.

Tue, 12/01/2009 - 00:46 | 147253 KeyserSöze
KeyserSöze's picture

Yep just as planned...in 3,2,1......

Tue, 12/01/2009 - 00:52 | 147258 Anonymous
Anonymous's picture

ok stupid question time: If I am borrowing in USD and investing in AUD, why am I buying USD and selling AUD if they raise rates in Aus? Doesn't this make carry trade more attractive?

Tue, 12/01/2009 - 00:56 | 147261 Anonymous
Anonymous's picture

I'm so tired of reading the dollar is backed by whatever is on the Fed's balance sheet. It's not like you can take a $100 bill to the Fed and exchange it for your minuscule share of their residential RE holdings, so it doesn't matter if their assets are 100% gold or 100% worthless mortgage derivatives - either way you have no claim to any of it.

Just because one of the Die Hard movie plots implied dumping the Fed's gold in the ocean would cause monetary collapse doesn't make it true.

Tue, 12/01/2009 - 03:34 | 147380 Anonymous
Anonymous's picture

Could JPY becoming a better carry cause the USD short squeeze that everyones been waiting for?

Tue, 12/01/2009 - 03:34 | 147381 Anonymous
Anonymous's picture

Could JPY becoming a better carry cause the USD short squeeze that everyones been waiting for?

Tue, 12/01/2009 - 04:03 | 147401 Anonymous
Anonymous's picture

weeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee

Tue, 12/01/2009 - 04:09 | 147406 CombustibleAssets
CombustibleAssets's picture

That's a clever bit of analysis Tyler.

Tue, 12/01/2009 - 05:00 | 147427 Unscarred
Unscarred's picture

Very clever.

Equally as clever as your avatar.

Tue, 12/01/2009 - 05:05 | 147428 Neophiliac
Neophiliac's picture

I think BoJ is trying to boost that ratio, but what they just announced won't work for the time being when it comes to USD. Using their 0.1% interest loans, one could do a riskless trade by using proceeds to buy 3-months sovereign debt and use it as collateral. US 3-months T-bills though, are yielding too little: just 4  bps these days.  

Tue, 12/01/2009 - 05:44 | 147437 Anonymous
Anonymous's picture

A Squid Got Kicked Out Downunder Today.

Malcolm Turnbull was the leader of the Liberal Party in Australia but got kicked out today. The reason - according to party policy he was suppose to oppose the government's Emission Trading Scheme but, being an ex Goldman Sachs guy he got the call from the head squid and voted for it. Fortunately he got defeated in a leadership challenge with 42 to 41 votes and there is now still a chance that the legislation can be blocked.

Tue, 12/01/2009 - 06:00 | 147441 Hephasteus
Hephasteus's picture

Pariah Carry with her one and only hit single. Saving all my asian love for an investment hero, spending all my cash on drunken rockstar wannabes.

http://www.youtube.com/watch?v=eBAhan8ZNGI

Tue, 12/01/2009 - 09:35 | 147492 Anonymous
Anonymous's picture

The USD/Yen carriers are working OT now to pump the Euro higher; but stangely after gold hit $1200 earlier and slipped back, the stock futures are also going nowhere despite euro now within reach of recent high of 1.51x; watch todays stock market closely, we might see some strange reversals, probably more distribution to avoid the mad rush of year-end book closing for some.

Tue, 12/01/2009 - 09:39 | 147494 Anonymous
Anonymous's picture

I am new to FX markets, If the AUD rate was hiked by 25bp it means AUD should be more dear relative to the opposite currency. Thus shouldn't AUD buy more JPY then previously why did things happen in the reverse, what's wrong with my logic???. Please somebody replu

Before 25bp increase
1 AUD = 80.18 JPY

After Increase announcement
1 AUD = 79.75 (should instead be more than 80.18)

Tue, 12/01/2009 - 10:12 | 147523 SWRichmond
SWRichmond's picture

There you go with those (1st order) derivatives again...

Tue, 12/01/2009 - 10:16 | 147527 Anonymous
Anonymous's picture

When AUD rate increases why did JPY & USD appreciate shouldn't in instead depreciate???

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