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Hindsight's One−Way Bets (revisited)

Thu, Jun 21 2007, 18:46 GMT
by Mihai Nichisoiu

Mihai Nichisoiu

Toshihiko Fukui, the current Governor of the Bank of Japan, has recently warned: expectations that interest rates in Japan will stay low could invite 'inefficient' investments. But, aren't the greatest rewards actually coming out from playing the most 'inefficient' markets and developments?

Central bankers uttering expressions like 'one-way bet' or 'inefficient' at a point where the practical applications of the 'carry-trade' concept enters parabolic stages in a myriad of major financial markets across the board may have exactly the opposite of the intended effect. Even more rampant, 'fundamentally misaligned' speculations may actually be encouraged.

It still is the Japanese Yen that appears to me as the biggest potential bet among the Asian currencies.

Bloomberg.com published couple of days ago a very interesting material, titled 'Housewives Outmaneuver UBS, Deutsche Bank Trading Yen', describing how 'Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world's biggest currency traders'.

When last year in May - June I was making the call of an 'important bottom' and forecasting a 'sizable recovery' in the NZD/JPY - I had no particular perception of the public roaring about the New Zealand currency being at the time ready to catch up with the Yen carry-trade.
Nowadays, however, housewives outmaneuver UBS, according to mainstream financial media. 'Carry-trade' pre-paid package offerings become a 'must-have' among signals providers across the board. FXCM, undoubtedly a benchmark for small retail, spot FX trading, introduces a 'carry-trade' model portfolio with a not half bad, multi-year backtested performance.

With the rampant chasing of high-yielding currencies quickly moving from the elite pack of the multi-billion dollar funds down to the mob of retail, to me it looks like we are no longer in the early stages of a self-reinforcing boom in the Yen carry-trade.

Published on  Thu, Jun 21 2007, 19:14 GMT