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Currency Speculations

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Yen Shows

Wed, Jul 11 2007, 19:54 GMT
by Mihai Nichisoiu

Mihai Nichisoiu

Bloomberg.com quoted on June 23rd:

'"The carry trade remains a very convincing story,'' said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. ``Unless we see a reversal in the rate expectations, that's going to continue. We don't see any risk of a rate hike by the BOJ until the end of the year."'

Reuters recently cited as well:

'"Unless there is a radical change in expectations for interest rates, people will look for levels to sell the yen," said John McCarthy, head of foreign exchange trading at ING Capital Markets in New York. "I find it unfathomable at times, but so much (trading) is model-driven interest rate plays."'

In their quest for what they should fear, I think a lot of people nowadays may be looking in the wrong, or incomplete to say the least, direction.

The indiscernible future of the Bank of Japan hiking interest rates is not the only scenario which could bring on a sizable turnaround in the Japanese Yen.

First off, I recall Michael Shedlock - one my favourite market commentators - noting that there seems to be too much consensus on what could exhaust the multi-year global credit bubble (a subject matter so closely related to the Yen carry trade). He writes, 'I am not sure what will pop this global credit bubble, but I suspect it will not be higher U.S. interest rates or a rising yen. More than likely, it will be either pure exhaustion, something totally off everyone's radar, or simply the reverse of some scenario that everyone expects.'.

That reminds me of my own, still living expectation that a sizable reversal in the Yen may be triggered mainly as a result of extreme technical conditions already embedded in some of the ongoing price parabolas themselves - for only in the later stages of the new state of affairs the public will undoubtedly manage to associate a fundamental rationale.

Secondly, as many of the major financial markets across the board - including but not limited to the stock markets - have continually overstretched over the latest months (and, in some cases, years), a sudden change in sentiment happening in one or more of those markets may have an instant and strong impact on the Japanese Yen as well. We already have been able to experience exuberant global correlations - like, for just one of the many examples, between the graphical price representation of some of the Yen cross pairs and that of several major European stock market indices.

Chrystia Freeland, Financial Times US Managing Editor, and Financial Times reporter James Politi interviewed George Soros in New York on March 6th - just a few days after the late February global financial riot. One idea in particular from the edited transcript of that interview I have found interesting by association with the second scenario of a possible turnaround in the Yen markets as described above:

'FT: We're speaking at a moment of a lot of turbulence in the markets. What's your explanation for what's happening?

SOROS: I think there are several factors but, very important, is the carry trade, the fact that the yen is basically interest free and a lot of money is coming from borrowing and a lot of Japanese money going abroad. And the yen was weakening so a lot of people got into that trade and there's a little bit of a shake-up going on.

FT: With the appreciation of the yen?

SOROS: That's right. I mean the appreciation of the yen shows that there is a shake-out. (...)'

Perhaps it is going to be again the appreciation of the Yen which will reflect rather than lead notable market turbulences happening elsewhere.

The third scenario could be about the indiscernible future of the Japanese interest rates moving upwards.
Even this perspective may not happen as in the academia - namely, it may have less to do with intrinsic Japanese fundamentals, and more to do with events about which I doubt the mainstream media or the bulk of market participants will find a reasonable fundamental reasoning any time soon.

The fourth scenario, at last, is about all the things I just cannot perceive or foresee as of now.
Although all three scenarios described above already began sending their early signals, one should stay even more alert - since there always is a fourth scenario.

Published on  Wed, Jul 11 2007, 20:27 GMT