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Carrytrade

Cardano ADA Will Outperform Cryptocurrency MarketHello, Skyrexians! Yesterday we considered the Bitcoin analysis where concluded that the potential growth is not going to be insane, bull market will be finished soon. At the same time on the BINANCE:ADAUSDT weekly chart we can see that price is charged for the flight. Let's notice, that Cardano has the specific bear market structure, where the corrective wave C has been finished in October 2023. Growth from the bottom was impulsive, so it could not be the wave B, in our opinion it's wave 1 of the new bull market. Since March 2024 most of crypto assets continued the bear market, but drop on ADA was not so big. It means that wave 2 has been formed already. Look at the green dot on the Bullish/Bearish Reversal Bars Indicator . This is strong bullish signal that this correction is likely to be finished, in conjunction with Elliott waves analysis we can see that the impulsive wave 3 is about to happen soon! Targets can be calculated using Fibonacci Extension. 1.61 and 2.61 corresponds to the area between $1.2 and $1.77. Note that this zone is not likely going to be the end of bull run. This is just wave 3 in this rally. Finally, we expect the new ATH for ADA in 2025. Best regards, Skyrexio Team
Long
by Skyrexio
6
USDJPY still has more downside on daily & weekly tfStructurally I'm looking for rejection at 147-149.8 range. Look for renewed selling action below 144 to confirm. Still seeing additional unwinding of the yen carry trade as highly likely over subsequent days & weeks. Targeting 136, 131, and 126 handles on weekly structure as we approach Q1 of 2025. Particularly as the US Federal Reserve is pressured to cut rates further with recent data. Entering short positions gradually but the majority is already in place.
by DaveTradesLive
Why is the Swiss Franc Defying the Odds?In a global economy where central banks are leaning towards softer monetary policies, the Swiss Franc is charting its own course—strengthening against the odds. But what forces are truly at play here? Is it merely the cautious whispers of the Swiss National Bank, or is there a deeper undercurrent, tied to inflation expectations and global safe-haven flows? As we peel back the layers, we uncover a narrative that challenges conventional wisdom. Discover the intricate dynamics that could redefine how we perceive currency resilience in today's volatile market landscape. The franc's unexpected strength has sparked a flurry of theories. Some point to the SNB's potential reluctance to cut interest rates as aggressively as its peers. Others suggest that the widening gap between Swiss and global inflation expectations could be fueling the franc's appreciation. Yet, the franc's safe-haven status and its role in carry trades add another layer of complexity to this puzzle. The EUR/CHF currency pair, a barometer of the Eurozone and Switzerland's economic health, is particularly sensitive to the franc's strength. As the franc appreciates, it can impact trade balances, inflation, and overall economic competitiveness. As the global economic landscape continues to evolve, the enigma of the Swiss franc's resilience persists. Is this a temporary anomaly, or a harbinger of a new era in international finance? Only time will tell.
Short
by signalmastermind
Shift in Carry Trades: Hedge Funds Embrace USDTRYA Shift in Carry Trades: Hedge Funds Embrace the US Dollar The once-dominant Japanese yen has historically been the preferred currency for carry trade strategies, where investors borrow low-interest-rate currencies to invest in higher-yielding ones. However, a significant shift is underway, as hedge funds increasingly turn to the US dollar as their borrowing currency. This strategic change is driven by a confluence of factors, including the US Federal Reserve's monetary policy stance, the weakening Japanese yen, and the allure of emerging-market currencies. The Allure of Emerging-Market Currencies Emerging-market currencies have long been a focal point for carry trade strategies, offering the potential for substantial returns. The relatively high interest rates in these economies, coupled with their often-growing economies, make them attractive investment destinations. However, the choice of borrowing currency plays a crucial role in determining the overall risk-reward profile of such trades. The Yen's Diminishing Appeal The Japanese yen has traditionally been a popular choice for carry trades due to its historically low interest rates. However, a combination of factors has eroded its appeal in recent years. The Bank of Japan's ultra-loose monetary policy, aimed at stimulating the economy, has kept interest rates exceptionally low. Moreover, the yen's weakness against other major currencies has increased the risk of exchange rate losses for investors who borrow in yen. The Rise of the US Dollar The US dollar, once a less common choice for carry trades, has gained prominence as a borrowing currency. Several factors have contributed to this shift. First, the US Federal Reserve's more hawkish monetary policy, characterized by interest rate hikes and a reduction in quantitative easing, has made the dollar a relatively higher-yielding currency. Second, the dollar's strength against other major currencies has reduced the risk of exchange rate losses for investors who borrow in dollars. The Case of USDTRY One notable example of the shift towards US dollar-funded carry trades is the USDTRY pair. The Turkish lira, with its relatively high interest rates, has been a popular target for carry trade investors. However, the increasing political and economic uncertainties in Turkey have made the lira a riskier investment. By borrowing in US dollars, investors can potentially benefit from the interest rate differential while mitigating some of the risks associated with the Turkish lira. Challenges and Considerations While the US dollar-funded carry trades offer potential benefits, they are not without risks. The US Federal Reserve's future monetary policy decisions, geopolitical events, and economic fluctuations in emerging markets can all impact the profitability of these trades. Additionally, the increasing popularity of carry trade strategies can lead to market volatility and potential reversals. Conclusion The shift in carry trade strategies from the Japanese yen to the US dollar represents a significant development in the global financial markets. As emerging-market currencies continue to offer attractive investment opportunities, the choice of borrowing currency will remain a critical consideration for hedge funds and other investors seeking to capitalize on these trends. While the US dollar has gained prominence, the potential risks and challenges associated with carry trades should be carefully evaluated before making investment decisions.
Long
by bryandowningqln
$USDJPY Carry trade unwind to continue? $131-108 targetsFX:USDJPY looks like it's set to fall further here. Equities took a hit when USDJPY went from 152 to 142. Now you can see that price rallied back up into resistance at 148, rejected it and looks set to fall more unless price can recover that 148 resistance. I could see another move down into that 131 level, however, there's a possibility that price can fall much more than that. I could potentially see a move all the way down to 115 -108 before price finds support. Those levels would be a successful retest of the bottoming structure price broke out from. After those levels get tested, then I think USDJPY will enter a long-term bull market. Let's see how this plays out over the coming months.
Short
by benjihyam
Yen Carry Trade Unwind: Is It Really Over?The unwind of the Yen carry trade has led to a significant breakdown in the USDJPY, shattering the ascending channel that had been in place since early 2023. We're now witnessing a retest of the channel's lower bound, where crucial resistance levels come into play. As asset managers continue to unwind their short Yen positions to mitigate risk, we may see a sustained strengthening of the Yen, potentially driving the USDJPY even lower.
Short
by ttp112358
6
Thin Markets Unnerve Traders: What to Know About Summer TradingLow trading volume is the market theme of the summer, which is driving investors to question their knowledge and ability to move in and out of markets. Forex, stocks, commodities and even crypto — they all seem more volatile during the summer quarter and there’s a reason for that. Big-shot traders ditch the trading desks for margaritas, espresso martinis and tan on the Amalfi coast while algo trading gets to slosh around billions of dollars. The result — thin liquidity sinks trades every now and then. August Trading Shakes and Stirs Markets The summer months have rolled in and with them a heightened feeling of unease has swept global markets. From a rally in the Japanese yen , to a big meltdown in stocks and crypto market carnage , asset classes got shook from this one market characteristic — volume . Thinning trading volumes disrupted the usual market rhythm, ushering in an environment dominated by increased volatility and unpredictable swings. Low volumes have the tendency to amplify price declines and increases. Illiquid August conditions may turn a rather normal move into a violent swing. Fewer shares traded means that a trading instrument is more susceptible to sharp price movements as there are fewer participants to absorb the trades. Panic Selling and the Carry Trade A volatility storm swept Japan’s stock market last week, throwing it into its worst single-day performance since 1987. Japan’s broad-based index Nikkei NI225 crumbled 12.4% in a single session while US stocks slumped 3%. Wall Street’s fear gauge, the VIX index of volatility VIX , shot up more than 50% to its highest level in 2020 when the pandemic was wreaking havoc. A day later, Japan bounced up 10% and the S&P 500 jumped 1%. The VIX shot lower by 28%. Japan ended up in the spotlight due to the unwinding of what’s called the “carry trade” — big hedge funds had borrowed trillions of cheap Japanese yen at near-zero interest rates to buy stocks or jam the cash into Treasury bills that pay a 5% interest. Risk-free. What’s not to like? The yen’s rise, for one. The sharp appreciation of the yen sent panicked carry traders scrambling to dump their holdings and repay their yen debt, which was getting more expensive. It’s the Algos’ Market, We All Live In It In August, traders typically exchange about 9.3 billion of US shares a day. Compared to March, where 13.2 billion shares change hands a day, that’s a 30% decrease in trading volume. Apparently, Wall Street does get a break from trading. Or does it? The stock market and the currency market, in particular, are dominated by and large by computer-trading algorithms that execute trades at lightning speed based on pre-programmed criteria. These algorithms, or simply algos, are allowed to process huge amounts of data and react to market conditions in milliseconds. While this can create efficiency and liquidity in normal market conditions, during periods of low volume — such as the summer months — they can contribute to increased volatility, especially if they are levered to the tune of 15, 20, 30 times. A single large order or a sudden piece of news can trigger a cascade of algorithmic responses, leading to rapid and sometimes exaggerated price movements. In other words, when these algos make a decision, that’s when volatility goes through the roof. Pair it with low volumes and you’ve got an explosion (or implosion) of prices. How to Survive Wild Markets? Given the unique challenges of summer trading, traders need to adjust their strategies accordingly. Here are some tips that can help. Lower Position Sizes : In a thin market, large positions can be harder to exit without moving the market (especially if you’ve loaded up on illiquid meme coins). Reducing position sizes can help mitigate this risk. Wider Stops : With increased volatility, it may be necessary to widen stop-loss orders to avoid getting wiped out by intraday market noise. Focus on Liquidity : Stick to trading more liquid instruments where possible, as these will typically be less affected by the summer slowdown. Hint: forex is the most liquid market. Keep an Eye on Economic Data : Summer doesn’t stop economic data releases , which can lead to outsized market reactions in a light market. Stay informed. Patience and Discipline : Summer trading requires patience and discipline. The temptation to overtrade in a quiet market can lead to mistakes. It’s often better to wait for clearer setups rather than forcing trades in a challenging environment. While you're waiting for the right moment to step in, test your strategies and find the best moves for future trades. What Do You Think? Summer trading presents a unique set of challenges that can unnerve even the most experienced traders. Thin markets, increased volatility, and the dominant role of algorithmic trading create an environment where caution is paramount. How do you handle volatile markets in thin trading? Let us know in the comments and let’s spin up a nice discussion!
Editors' picks
SP:SPX
by TradingView
4
SPX Showing Signs of Weakness at PCZ of a Bearish Alternate BatThe RSI on the daily has begun to rollover as the SPX appears to have rejected off of the Bearish Alternate Bat HOP level. There does not appear to be much nearby support within the range the SPX is currently trading in so if it gets back below the previous All-Time High I could see it coming back down to around $5100 maybe even $5000 - $4800. This all seems to be brought on by the increase in JGB Yields disrupting the Carry Trade. We may see them try to stabilize the carry trade around $5100 but there is a heightened chance of failure. More on the carry trade can be seen in the related idea below.
OANDA:SPX500USDShort
by RizeSenpai
Bond Market Hints Towards a Second Wave of Shorts to hit the JPYLate last year the Spread of the US/JP Carry Trade hit the PCZ of a Bearish Shark resulting in it pulling back to the 50% Retrace, this came ahead of Bearish Action in the stock market and strength in the JPY. However, the bounce at the 50% retrace indicates that it could turn into a Bullish 5-0 which would result in higher highs. In addition to that, the leverage ratio on the trade has been forming what looks to be a nice looking Cup with Handle pattern, which if it plays out would bring the leverage ratios up from 500% to well over 800%. This would likely align with higher highs in the SPX, Higher Inflation Rates, Higher Commodity, Import/Export Costs, and a continuation of the falling Japanese Yen. I will leave the chart of last year's Carry Spread Chart Post below for reference.
TVC:US10YLong
by RizeSenpai
BITCOIN|Does the BULLISH trend continue?Bitcoin chart in 4 hours time frame. In the previous analysis, we saw that there was a significant upward movement in the area of demand that we considered. I hope you have used this opportunity well. Currently, Bitcoin is strongly bullish and there are no signs of weakness in the trend, so we should look for more suitable places, areas of valid demand to enter buying positions. As you can see, Bitcoin had an initial correction up to $46,600, but it came back with demand and is currently trading in the range of $48,300! Until this moment, we have not seen a strong negative reaction from Bitcoin, and this means that the power of the Bulls is still high! The demand ranges are ($44,900 to $45,500), ($42,800 to $43,300)respectively! In case of an upward trend, its mid-term targets are $50,500 and $52,700 , respectively!
Long
by Golden_Star1994
AUDJPY: BAMM Breakout Headed for a 50% RetraceI suspect as the Japanese Carry trade is pressured, that there will be an effort made by institutions to convert to AUD in anticipation of Australian Interest Rates potentially rising above US Interest Rates, this would revive the more traditional Australian Carry Trade and serve to reduce the downwards pressure put on the Japanese carry trade while also reducing their overall leverage and should allow them to prolong the Bull Market in equities at least until the spring. Meantime the conversion to AUD should Temporarily push the value of the AUD up higher and given how much leverage would be going from JPY to AUD, I'd suspect the rise we see in AUD to be a bit on the extreme side which could lead to us very quickly seeing AUDJPY reach the more macro Fibonacci retraces between 139 JPY to 191.567 JPY.
Long
by RizeSenpai
4
Bullish Shark on the Japanese Yen Futures Feb 16th ContractThere is a Bullish Shark visible on the Japanese Yen Futures contract expiring on Feb 16th 2024, there is also RSI Bullish Divergence on the 4 Hour Timeframe at this level. A higher low bounce in the JPY from here would likely result in further tightening of the Japanese carry trade, which would be bad for stock and particularly bad for REITs and Financial Institutions. Saying as though it is the Feb 16th Contract that this Harmonic has completed on, I would expect the JPY to rise sharply leading into the expiration of this contract.
CME:6JG2024Long
by RizeSenpai
The Bond Market is Pricing in a Collapse of The Yen Carry TradeThe spread between the US10Y and JP10Y has historically been a great leading indicator of contraction within the Yen Carry Trade and likely will be into the future. If we were to apply TA to it, we can see that the spread appears to be Double Topping and has formed a Bearish Shark at this top as the RSI breaks down and the MACD Diverges. If we are to take this as a warning, then we should expect this spread to go down significantly, and that would be accompanied by the contraction of the Carry Trade, leading to lower liquidity and signfiicantly tighter credit conditions and ultimately a depreciation in market pricing. I think we could see JPY and USD strength during this time but would avoid other currencies.
TVC:US10YShort
by RizeSenpai
2
ZARJPY: Massive Head and Shoulders with Bearish DivergenceIn addition to the Bearish 5-0 I pointed out before on a previous chart, the ZARJPY has also formed a Potential Bearish Head and Shoulders that is visible on timeframes even as high as the monthly with Bearish Divergence on the MACD and RSI. If The Carry Trade truly is to be dissolved, the ZARJPY should be among the currency pairs that are most severely affected, as it has the highest interest rate differential and therefore generates the highest yield for the time being.
Short
by RizeSenpai
ZARJPY: My Bearish Speculation Against The JPY Carry TradeWe have some Bearish Divergence on the ZARJPY, but the main reason I entered this trade was to speculate against the JPY Carry Trade and front-run the potential flight we may get back to the Yen if Japanese Yields were suddenly to go up or even become uncapped during the BoJ meeting tonight. I could have shorted EURJPY, GBPJPY, AUDJPY, or USDJPY instead, but I feel ZARJPY may give a more violent reaction as it is a currency that has generated some of the highest yields vs the JPY thus far, and if that yield were threatened, I think it would move down quite fast compared to the other pairs. I guess as a side note: This might end up being a Bearish 5-0 in the long run.
Short
by RizeSenpai
2
2 FX Shorts with excellent oddsStarting with the pair which makes no sense at current levels, considering the most meager of rate differentials at +2.5% , were it not for the SNB's deranged policy of "supporting the Swiss Franc as an inflation fighting measure" (while Swiss inflation is barely holding at 2%!) and with the Swiss Franc already at nose-bleed levels. CHFJYP; a 50 year SHORT in the making; The main chart is the MXNJPY - SHORT , also the premier carry-trade - while equities are trying to cling to the remnants of an already burst bubble. While the Bank of Mexico has increased the rate differential (versus the static Yen) two-fold, in short order, that rate differential remained the same since 03/2023 while this pair continued on it's upward trajectory an additional 16%, incidentally inline with the SP500's identical increase during the same period; Both of these pairs are at multi-year technical confluences, both pressing against significant resistance and showing distinct patterns of reversal. SHORT & SHORT
Short
by Nemo_Confidat
1
Prime Target: Carry Trades - except for the USDJPY!Sure, the Yen is overly weak on a trade-weighted basis BUT it is the least weak versus the USD! E.g., For any intervention to be effective it ought target just about any other high yielding spread/pair EXCEPT for the USD! Having established that, it is still far more likely that any intervention would target the USD/JPY directly than the rest, if for no other reason but for its success last September (2022). (Last September, dollar longs were extremely overcrowded which amplified the effects of that intervention, and then most of the cash went into carry trades.) Times have changed, though, whether the BoJ will be willing to subscribe to that notion or not. (which is yet to be seen). OK, so where does this potential paradox (or rather, just a dichotomy? ;-) leave one, in trading terms? 1) If there ever was a right time to trade the Japanese Yen against a basket of it's counterparts, now would be it! (Work has almost completed on just such a basket this time with correct weighing. ;-) 2) FX options (especially Gamma changes) have been gauging the potential market effects of the BoJ's various jaw-boning attempts (most of which were summarily ignored by the markets) in support of the Yen, rather accurately. "If it ain't broke don't fix it." Stick with it! p.s. The CHF/JPY is a special case here (not quite a carry trade) as it's eye-watering rise is due to the same, deranged SNB policy which ended in tears, back in 1978-79. (... Switzerland slipping into a far deeper depression than it's trading partners, back then.)
by Nemo_Confidat
2
The Carry Trade With the current aggressive interest rate hikes happening with some of the world's leading central banks due to inflation problems, we figured it would be an ideal time to discuss the carry trade. This post will go into further detail about the carry trade and how it works in the forex market. We will also discuss one of the most popular carry trades to take place in forex history and the risks traders should be wary of when trying to implement this strategy. What is the carry trade? The simple explanation of the carry trade is that a speculator borrows one financial instrument to buy another financial instrument. For example, let's assume that you go into a bank and borrow $10,000, which then charges you a 1% lending fee ($100). You then take that $10,000 and purchase a Treasury bond that pays you 5% a year. Your profit is 4% (minus commissions and other costs). Basically, you have profited from the difference in the interest rate. This is the carry trade in its simplest form. The carry trade in the Forex market The carry trade in the forex market is one of the oldest and simplest forms of forex trading strategies. It was first developed by fund managers to take advantage of the interest rate differentials between currency pairs. A carry trade occurs when you buy a high-interest currency against a low-interest currency. For each day that you hold that trade, the broker will credit you the interest difference between the two currencies (this difference is called the 'interest rate differential'), as long as you are trading in the interest-positive direction. To understand this further, let's give an example: In the forex market, currencies are traded in pairs (so if you buy USD/JPY, you are actually buying the US dollar and selling the Japanese Yen at the same time). You receive interest on the currency position you BUY and pay interest on the currency position you SELL. What makes the carry trade unique in the forex market is that interest payments take place every trading day based on your position. This is because technically, all positions are closed at the end of the trading day in the forex market. You just don’t see it happen if you carry your position overnight due to the fact that brokers close and reopen your position, and then they credit or debit you the overnight interest rate differential between the two currencies (this is also called a rollover or swap). The amount of leverage available from forex brokers has made carry trades very attractive in the forex market. Most, if not all, forex trading is margin-based, meaning you only have to put up a small amount of the position and your broker will put up the rest. Many brokers ask traders for as little as 1% or even less as margin to trade a position. Continuing from our above USDJPY example, let's assume that interest rates are 6% for the US dollar and 1% for the Japanese Yen (so the interest rate differential is 5%). Let us assume that you deposit $10,000 with a broker and decide to buy USDJPY with the intention to carry trade and earn +5% interest a year. Let's say the broker offers you 100:1 leverage and you want to purchase $10,000 worth of that currency. Since the broker is offering you 100:1 leverage, you would only require a 1% deposit for the position; therefore, you hold $100 in margin. Now you have an open USDJPY trade that is worth $10,000 and is receiving 5% a year in interest. To get a clearer picture of this, let's see the image below: What will happen to your account if you do nothing for a year? There are three possibilities. Let’s take a look at each one in the image below: Due to the 100:1 leverage being offered to you, in this scenario you have the potential to earn at least 5% a year from your initial $10,000, but there are huge risks to this (we will get to that later). The infamous AUDJPY carry trade During the early to mid-2000s, traders experienced near-perfect combinations of these conditions across numerous forex pairs, most popularly the AUDJPY. This particular FX carry trade involved going long on the AUDJPY. The Australian dollar has historically yielded higher interest rates than other global currencies. The Bank of Japan has been keeping interest rates low since the mid-1990s in an effort to revive the economy after a stock market crash caused a recession. The Bank of Japan has persisted with its approach to low interest rates, and in 2016, it announced negative interest rates. This means Japanese banks now pay interest on the cash they deposit with the Bank of Japan instead of earning interest on it. AUDJPY Exchange Rate and Interest Rate Differential 2001–2014 As you can see in the image above, the interest rate differential between Australia and Japan was consistently high. Due to the Australian dollar yielding a much higher return on investment compared to the Japanese yen, the situation provided retail traders and big institutions great opportunities for carry trading to occur with this currency pair and reaped huge profits from it. These conditions boomed, especially throughout the early to mid-2000s; however, this seemed to change just before the end of the 2000s. In 2008, with the global recession, the economic conditions surrounding Australian and Japanese investments changed as interest rates in Japan drifted slightly upward from near zero to just above zero, while interest rates in Australia fell considerably. As a result of both countries having their interest rates close to each other, the Japanese yen drastically appreciated against the Australian dollar, which would have caused traders huge losses when implementing the carry trade method during this period. You can see this in the chart below: AUDUSD 3-Month Chart Interest rates have changed since then: as of August 2023, Australia's interest rates are now back up to 4.10%, while Japan's interest rate remains at -0.1%. Risks of the carry trade The biggest risk in a carry trade strategy is the absolute uncertainty of exchange rates. For example, if a trader is buying a currency to profit from that currency pair's interest rate differential and the country of the currency cuts its interest rate unexpectedly, the exchange rate of that currency will most likely drastically fall, which can potentially cause the trader to suffer sudden and big financial losses. Due to this, it is important to look at more than just the interest rates on the currencies before you trade on the forex market. Additionally, if a country’s economic outlook does not look positive, the demand for that country's currency will decrease, especially if the market thinks that their central bank will have to lower interest rates to help their economy. Another important risk factor for traders to consider with the carry trade is that if substantial leverage is used to implement it, then big market moves against the trader's favour could result in losses that may cause margin calls, the position being automatically stopped out, or worse, losing more than your initial deposit and the trader's account ending up in a negative balance. Lastly, global markets and economies have still not fully recovered from the global crash of 2008. Carry trades are very difficult to do now with major forex pairs due to the majority of brokers no longer offering positive swaps on major pairs. Traders have been looking at some exotic currency pairs as viable options because some of their countries' interest rates are still high. Exotics such as the Mexican peso, the South African rand, and the Nigerian naira are all options that many forex brokers offer, with currency pairs featuring USD, GBP, EUR, and even JPY variations. However, exotic currency pairs can be extremely volatile and dangerous as traders are susceptible to experiencing big market moves constantly in both directions, which makes these currencies very unpredictable and can cause traders big losses. These currency pairs can also be very expensive to trade due to the high spreads and possible additional commission costs. 1 Month MXNJPY chart example: The above chart shows that traders have been looking at exotic currencies as alternative options to continue carry trades, though they pose very high risks and can be very expensive to trade. The carry trade, while potentially lucrative and rewarding, can be very dangerous, and you must consider all risk factors if you are looking to implement this trading method. Trading this way with major and cross-currency pairs is very difficult to do now, and we cannot stress enough that you must trade with absolute caution if you’re implementing the exotic currencies into your own carry trading strategy. That being said, we may get to a time again where carry trades are possible with major currency pairs as interest rates are going back up globally in an attempt to recover from the global inflation crisis. Forex brokers may be open again to offer traders positive swaps on majors and crosses. BluetonaFX
Editors' picks
Education
by BluetonaFX
24
Why is the Bank of Japan nervous? ...To properly represent (and trade!) the Yen related pairs, it is strongly recommended to create a Yen-based currency basket. (I did attempt to import data into TV from such a basket - weighted by the acceleration differential between the USD, EUR, GBP, AUD, CAD, CHF and a basket of Central European currencies versus the Yen but for some reason I couldn't make that work. I.e., the main chart here represents the next best thing which is an unweighted USD|EUR|GBP|AUD|CAD / YEN basket, to convey the same idea.) The central problem the Bank of Japan is facing at this moment, continued acceleration of rate (and thus, price) differentials relative to the other G-20 currencies. (I.e., The Yen price levels, alone, would not cause the same concerns.) On the top of it, China's PBC decided to dump massive amounts of Yen (and Euro) reserves, still actively taking place as of last Friday. The now solid uptrend in Japanese economic indicators also continue to add to the upward pressures, leaving the BoJ with ever less wiggle-room. FX Yen options implied volatility - 8.34%-8.93% - is running under historical levels, (i.e. they are considered "cheap") despite the increased Call buying, as of late. Ultimately, what the BoJ will be forced to do here, and most importantly When(?) and to what extent, is still open to debate but two aspects of this issue became rather obvious; 1) At this point markets, in general, seem to maintain a complacent stance (see options pricing) regarding the significance and potential magnitude of a BoJ move; 2) This is a 30-year, $3+ Trillion Dollar short position which will have to be unwound (covered) in the event of a BoJ interest rate hike and as such, liquidity will be a major issue! To illustrate the last point - above -, this was the recent EURJPY action following a rumor that the BoJ "may do something";
by Nemo_Confidat
2
The Rand in the rocky credit markets The economic calendar is wild this week so I thought it would be best to do a deep fundamental dive into the USDZAR . All the attention will be on the Federal reserve tomorrow and whether or when they will pause their rate hikes. We need to look past the hype around the interest rate and the “pivot" narrative. Focus should however be on how the markets will cope with the Fed’s liquidity drain and how it will impact the future price of money ( ie . Interest rates). Before we kick-off, correlation does not imply causation... I’ll start by explaining the chart you’re looking at. What you’re seeing is the positive correlation between the USDZAR and the difference between the South African government bond 10-year yield (ZA10Y) and the US 10-year treasury yield (US10Y). The interest rate differential is referred to as the carry trade potential. Investors can borrow money on the cheap from developed low-risk markets and invest the borrowed money in riskier destinations to earn more interest. The interest rate difference is then pocketed by the investor. The preferred vehicle to capitalise on the interest rate differentials between two locations are government bonds (they are low risk and liquid). The reason for the positive correlation between the USDZAR and the bond yield differential is because when there is risk-on sentiment in the market, investors tend to move funds out of the safety of US treasuries and into riskier assets. The sell-off in US treasuries causes US10Y yields to rise (decreasing the bond yield differential), and the rand tends to appreciate in risk-on phases of the market, citrus paribus. (Decreasing bond yield differential; USDZAR decrease due to rand appreciation). Conversely, when investors are risk-off they run to the safety of US treasuries. The buying of US-treasuries lowers the US10-year yield which increases our bond yield differential. We all know how rapidly the rand can depreciate in risk-off phases when the liquidity wave pulls back to the US, leaving the rand on the rocky shore. (Increasing bond yield differential; USDZAR increases). Our strong correlation however weakened in August 2022 when the US 10-year yield rocketed higher after the Fed started their hiking cycle. Let’s zoom in on the Fed since its Fed week. The most important chart in the market , the Fed’s balance sheet: www.federalreserve.gov . The Fed has so far tapered roughly 5.52% off its balance sheet since April 2022. The Fed is selling treasuries to taper its balance sheet and to soak up liquidity from the market (if there will be enough buyers, only time will tell). This is rand negative. Now let’s get to where all this week’s focus will be, the Fed’s interest rate decision. The Fed is expected to slow its rate hikes to 25bps this week and push rates from 4.50% to 4.75%. The Fed tends to follow the US02-year yield (US02Y) as guidance on its interest rates and it seems as if the US02-year yield has topped out between 4.75% and 5.00%. The Fed pause seems near, and the latest inflation figures from the US supports the narrative that the Fed has managed to cool inflation. The most concerning thing in the market currently is the inverted yield curve: History doesn’t repeat itself, but it rhymes. For the Fed to normalise the credit markets it will have to pause rates. That is usually when something the market breaks and the Fed is forced to cut rates and inject liquidity into the markets. When the Fed pushes easy money ( QE or whatever buzz phrase they'll use) into the market investors rotate from longer dated bonds to shorter dated bonds. To conclude, if and when the Fed pauses its rate hikes, the US10-year yield will melt higher which could be rand positive based off our correlation analysis. Just have popcorn (and gold , silver and other real assets) ready for when the Fed is forced to cut rates/ pivot because that will be caused by arguably the biggest credit market implosion in the history of fiat money. To end off I leave you with the words of Zoltan Pozsar: "commodities are collateral, and collateral is money."
by Goose96