Japan Is The Catalyst, But It’s The Mortgage Market That Could Tip It Over The Edge
This Is A Big Deal
If you’ve followed me at all on Twitter/X over the past several months, you’ll know that I’ve been quite vocal about the risk that Japan currently presents to the global economy. If you need a reminder…
The plunging yen can cause many things, but a destruction of the yen carry trade might be at the top of the list. Why is this so important? A lot of traders like to borrow cheap yen in order to invest into higher yielding or higher returning assets. The weaker the yen gets, the more attractive the trade gets.
With the yen/dollar exchange rate sitting at or near 30+ year lows, you can argue that the yen carry trade hasn’t been this attractive in decades.
But the past month has been something else entirely. After a long period of speculation, the Bank of Japan finally pulled the trigger at the 160 level and intervened to save the yen.
As far as we can tell, the BoJ has intervened at least twice (they’re not exactly forthcoming with this kind of information) and the results have been, let’s just say, less than stellar. As we can see in late April, the BoJ bought billions of dollars worth of yen and it almost immediately began selling off in the open market. It happened again at the beginning of May and, once again, the selling resumed. For the past week, the yen has been selling off relative to the dollar and the exchange rate is right back to where it was pre-intervention. The BoJ’s efforts thus far have been fruitless.
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