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I'd guess that people who were doing the YEN/USD carry trade overwhelmingly used the USD to buy US tech stocks (for the same reasons anyone else would). Now tha
by jdenning 2y ago
I'd guess that people who were doing the YEN/USD carry trade overwhelmingly used the USD to buy US tech stocks (for the same reasons anyone else would). Now that the carry trade is unwinding, they have to sell the stocks to cover their positions. A bunch of people dumping large amounts of stock will cause the price to go down.
Edit: Also, I'd guess that once the tech stock prices started tumbling, it caused a lot of people who have nothing to do with the carry trade to sell, causing further price decline.
- bdjsiqoocwk 2y agoSorry my ignorance, but when you long YEN/USD you're short USD. That trade uses up USD, it doesn't give you USD. You cant use it to buy stocks. Instead you have to give up buying stocks in order to put on that trade. Am I wrong?
- jdenning 2y agoThe “carry trade” is borrowing one currency (yen) at a low rate, swap it for a currency that is more expensive to borrow (usd), then use the expensive currency to buy assets (bonds, stocks, whatever). The difference between the yield you get from the asset and the cost of the original loan is where the profit is.
- bdjsiqoocwk 2y agoNow I'm even more confused. I thought that yen was the one with high interest rate, of the two. If yen is the one with the low ir, why does it matter that the boj cut ir?
- jdenning 2y agoYeah, I think you misunderstood the situation :) - Japan raised their rate from 0% to 0.25% and cut back their bond purchases in a move to strengthen the yen, at the same time the dollar got weaker. The Nikkei tumbled because many large companies in Japan - 1) had carry trade positions they had to unwind, and/or 2) export to the US (harder when dollar is weak vs yen and harder if the US enters recession).
- bdjsiqoocwk 2y agoUnderstood, thank you.