"Anyone who had been making the carry trade, by borrowing in low-yielding Japanese yen and parking in the higher-earning Mexican currency, has just burnt their fingers."@johnauthers pic.twitter.com/rlEsh6FyCm
— Daily Chartbook (@dailychartbook) June 4, 2024
🍿POPCORN ALERT 🍿
I just confirmed a very big $JPY carry trader is being liquidated on a substantial $MXN position after losing a ton on yesterday #Mexico #stocks implosions
Explains what’s happening to $JPY ( $MXN sold to buy back $JPY, close the borrow and net the hedges) t.co/LmlcplJC1p pic.twitter.com/hv5ewQ069Q
— JustDario 🏊♂️ (@DarioCpx) June 4, 2024
The yen carry trade is a financial strategy where investors borrow Japanese yen (JPY) at a low-interest rate and then use those funds to invest in higher-yielding assets denominated in other currencies. Here’s how it works:
- Borrowing Yen: Traders borrow yen from Japanese banks at the prevailing low-interest rates.
- Investment: They convert the borrowed yen into another currency (such as U.S. dollars or Mexican pesos) and invest in assets (such as bonds or stocks) in that country.
- Interest Rate Differential: The goal is to take advantage of the interest rate differential between Japan (low rates) and the target country (higher rates). By doing so, they earn a profit based on the interest rate spread.
- Profit Mechanism: The trader receives high-interest rates on the money invested (in the higher-yielding currency) but pays low-interest rates on the yen borrowed. The difference between the two interest rates contributes to their profit.
- Currency Appreciation: Ideally, the trader benefits not only from the interest rate spread but also from currency appreciation. If the higher-yielding currency appreciates against the yen, they can sell it at a profit when converting back to yen.
Now, let’s address the implications mentioned in your statement:
- Burnt Fingers: The phrase suggests that someone who engaged in the carry trade using yen has suffered losses. This could happen if the value of the yen increases (making it more expensive to repay the borrowed yen) or if the value of the other currency (e.g., Mexican peso) declines significantly.
- Liquidation: The trader you mentioned is being liquidated on a substantial Mexican peso (MXN) position. This means they are forced to sell their MXN assets to cover their yen borrowings. Such forced selling can exacerbate losses.
- Yesterday’s Implosions: The recent stock market turmoil in Mexico may have triggered losses for the carry trader. If the Mexican peso depreciated sharply due to market instability, it would negatively impact the trader’s position.
Sources:
www.thebalancemoney.com/yen-carry-trade-explained-pros-cons-how-it-is-today-3305971
www.cnbc.com/id/100414231
zodiactrading.medium.com/decoding-the-yen-carry-trade-volatility-mechanism-and-risks-a3a98edf5427
www.federalreserve.gov/econres/ifdp/what-can-the-data-tell-us-about-carry-trades-in-japanese-yen.htm
www.economicshelp.org/blog/glossary/yen-carry-trade/