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From what I understand (and I may be completely wrong so please someone correct me) is that these rate hikes are causing the “carry trade” (estimated to be 20+

From what I understand (and I may be completely wrong so please someone correct me) is that these rate hikes are causing the “carry trade” (estimated to be 20+ trillion dollars) to come to an end and investors are unwinding their positions fueled by these low borrowing rates- which is why we’re seeing US stock prices being dragged down as a result as well. (Investors borrowing yen at low value, investing in higher yield equities aka S&P500, and now owe yen at potentially higher than original cost, causing panic selling).

panarky 2y ago
Yes, hedge funds were selling (borrowing) yen which had positive carry, to fund purchase of US tech stocks. The carry is gone so now they're closing their positions, which means buying yen (which makes the yen stronger, which hurts Japanese exporters), while selling US tech stocks.
- deepfriedchokes 2y ago
  I bet this is why Warren Buffett was freeing up cash.
- RCitronsBroker 2y ago
  "One big bond market investor christened his yacht Positive Carry"
- shiandow 2y ago
  I'm almost getting it but I feel like I need a step by step explanation. From what I understand the JPY had a low or negative interest rate which made it effectively 'free' or at least cheap to borrow funds in it. So am I correct that it was supposed to work like the following: - Borrow JPY at a low interest rate - Convert to USD - Buy stocks - Sell stocks (ideally with profit) - Convert to JPY - Pay back JPY loan (which had a low interest rate, leaving more profit) For this to work the JPY interest rate had to remain low and the yen had to remain cheap, both of which are now no longer certain which is exacerbated by investors cutting their losses en masse making the yen more expensive (and maybe increasing the effective interest rate as well?).
jxm262 2y ago
This matches my understanding. An article explaining this a bit. Things are not looking good right now. Korean markets already hit the circuit breakers tonight. https://www.reuters.com/markets/currencies/boj-shift-gives-yen-shake-causes-reassessment-popular-fx-trade-2024-07-31/#:~:text=Yen%2Dfunded%20carry%20trades%20in,'carry'%20on%20such%20trades https://www.reuters.com/markets/currencies/boj-shift-gives-y....

panarky 2y ago

Yes, hedge funds were selling (borrowing) yen which had positive carry, to fund purchase of US tech stocks. The carry is gone so now they're closing their positions, which means buying yen (which makes the yen stronger, which hurts Japanese exporters), while selling US tech stocks.

deepfriedchokes 2y ago
I bet this is why Warren Buffett was freeing up cash.
RCitronsBroker 2y ago
"One big bond market investor christened his yacht Positive Carry"
shiandow 2y ago
I'm almost getting it but I feel like I need a step by step explanation. From what I understand the JPY had a low or negative interest rate which made it effectively 'free' or at least cheap to borrow funds in it. So am I correct that it was supposed to work like the following: - Borrow JPY at a low interest rate - Convert to USD - Buy stocks - Sell stocks (ideally with profit) - Convert to JPY - Pay back JPY loan (which had a low interest rate, leaving more profit) For this to work the JPY interest rate had to remain low and the yen had to remain cheap, both of which are now no longer certain which is exacerbated by investors cutting their losses en masse making the yen more expensive (and maybe increasing the effective interest rate as well?).

jxm262 2y ago

This matches my understanding. An article explaining this a bit. Things are not looking good right now. Korean markets already hit the circuit breakers tonight. https://www.reuters.com/markets/currencies/boj-shift-gives-yen-shake-causes-reassessment-popular-fx-trade-2024-07-31/#:~:text=Yen%2Dfunded%20carry%20trades%20in,'carry'%20on%20such%20trades https://www.reuters.com/markets/currencies/boj-shift-gives-y....