What Is The Japanese Yen Carry Trade, And Why Is It Crushing The Markets?

With Japanese markets crashing overnight in the U.S. we take a look at why it is effecting global markets.

Transcript

00:00Okay, so let's stop with the first point. You've still got the Japanese yen up there.

00:04Let's explain quickly, because some people may not know what a curie trade is.

00:09I had to go back to my university days when they were teaching this because I don't do,

00:14you know, interest rate, you know, differentials, but I took it all in school.

00:19So, you know, basically, easy summary, you borrow in low interest rate currencies,

00:27and then you take the proceeds, convert them over to a currency that has a higher interest rate.

00:33So obviously, a lot of people borrowing in Japanese yen, because interest rates are so

00:38low over there. Then you turn it around and you invest in a higher interest rate currency,

00:41and you get the difference. So you can borrow in yen, I'd say 1%. I think it's the rates were even

00:46less than that. They were almost nothing for a long time in Japan. Let's say hypothetically,

00:50borrow in Japan at one, come over in the US, invest at five, you pick up four points,

00:55three, 4%, right? Free money, free money. The currency strengthens, and you get a 12%

01:02move in a currency in one day, those little 4% carry trades, 4% over a year, don't look so darn

01:09good. So you probably have a lot of people blowing out on this saying, Oh, my gosh, you know, I'm

01:15trying to pick up three, four points, I just lost 12. There's your quick summary on the carry trade.

01:20So that's crushing some people for sure, if they're in there. I don't know why, you know,

01:24do you think it's no risk trade? Oh, yeah, I'm just making 4% guaranteed. And move 12% overnight

01:30is a serious, serious, serious move. So I don't know that that has an impact, a serious impact

01:36on the markets here today. Well, let me say one more thing about that. I mean, it spreads to

01:42all the other currencies that had a higher rate. So exact like the Mexican peso, right?

01:47Yeah, we're doing it. It's just, you know, it's not. It's yen dollar, it's yen this,

01:53yen crown. Yen versus Australian dollar was somebody was giving an example. I mean,

01:58there's all, yeah, it's all over the place, not just down in the US, down everywhere,

02:02people borrowing cheap money in Japan. Well, cheap money in Japan might still be cheap.

02:06But all of a sudden, those yen just explode in value, you got to buy them back.

02:10That's 12% overnight. So that is, that's going to crush some people for sure. If you're in this,

02:17you're probably getting crushed on that if you're in that carry trade. So that's hurting some people.