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Yen Carry trade and Renminbi


The Chinese markets crash was directly linked to Yen's appreciation.

China and renminbi have been traditionally closely and negatively correlated with Yen.

One of the reasons for closeness is Japan is one of the important consumer of Chinese goods. And geo-politically, renminbi-yen have played two-swords-in-a-scabbard roles for a long time. With Yen's role as premier asian currency challenged by Renminbi. The movements in the market is very much the symbolic of this see-saw of power.

The Yen carry trade is a big underlying factor in these equations. It would be naive to write off its impact. And it would be equally naive to say carry trade is over.

What is carry trade? Carry trade is arbitration. Arbitration of interest rates. Borrow at cheapest rates and lend at highest rates. What is the risk? The risk of adverse currency movements, cutting into the profit margins.

The important factor is the 'difference' between the rates. The difference between say US and Japanese still is very significant for carry trade to make sense. But the important fact is, the curve flattened for the first time. This simply means, the easy carry trade money is over. Easy carry trade money was part of exodus. The carry traders would now have to work, and actually be awake, to manage their carry trade currency portfolios. Difference is still lucrative, but world was made aware for the first time in many years that difference wont just keep growing and that it can decrease. And that the carry trade is not risk free.

The exchange risks cannot be fully hedged/covered given the size of carry trade portfolios. The sharp appreciation of 5% in Yen in a matter of week would have scared the wits out of complacent traders

Technically, the Yen looks in between grounds trying to make up its mind. The present rise from 15.15 does not seem to be able to hold on. Yen appreciate again to retest the 15.15 levels and more important 14.90 levels. 14.90 range would be an important support, the break of which would result is more upside for yen. Elliotically, the present structure seem to be a 'fourth' within 'c' (or 4th within 3rd). Either of which seem to indicate further strength for yen. The move to levels near 15.15 should be possible.
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