It’s no secret that there has been absolute mayhem in the financial markets – not only in the currency markets but also in equities, the cryptocurrency space, and many other financial instruments. In this video, I want to go over a potential reason why this could be occurring. In fact, I believe this is more likely than not, considering what I am looking at here. Without further ado, let’s get straight to it.
Welcome! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds in finance over the last several years, and I’m here to share with you everything that they have poured into me.
In this video, I want to discuss a particular trade that is occurring right now and that has potentially caused all of the bleeding across a multitude of markets. This potential trade is called the Yen Carry Trade. If you don’t know what that is, let me explain.
A carry trade is quite popular among hedge funds, and it is a way of making easy money, provided that there isn’t a violent move that occurs during your carry trade. Unfortunately, just such a thing has already started to happen.
In essence, a basic carry trade is a foreign currency trade. The objective is to borrow in a cheap currency and invest that back into a more expensive currency. What ends up happening is that you take the difference in the interest rates. The cheap currency will have a low interest rate, and the more expensive currency will have a higher interest rate. Essentially, you pocket the difference. It seems easy and sounds like easy money, but unfortunately, all easy things often end up being hard.
The reason why the carry trade is happening with the Yen is because the interest rate has been so low for so long. In fact, it’s practically zero. However, what has happened recently is that they raised their interest rate, which unfortunately makes the carry trade make a little less sense. Not only does it make less sense in terms of taking a small financial loss, but unfortunately, billions if not trillions of dollars have been involved in holding Yen for the purpose of having a lower interest rate and investing it in many other places. However, those involved took the risk, knowing that the interest rate could potentially rise higher.
Let’s say you borrowed a million Yen and you took that million Yen and invested it in Australian dollars or US dollars – whatever it may be. Now that the interest rate on the Yen has gone higher, you now have to pay the difference on how many Yen you borrowed. So, if you borrowed a million Yen and the interest rate moves, leaving you with 800,000 Yen, you now have to make up that difference just because of the fluctuation in their interest rate hike. That’s what just happened.
Let me go ahead and share my screen to show you exactly what I’m looking at here.
So, here we have Japan’s interest rate. The last time they actually raised rates was back in 2007, and the time before that was during World War II. Something I find quite interesting here is that the history of Japan’s interest rate is almost inverse to US dollar interest rates. In 2008, we actually dropped rates substantially, while Japan raised them quite rapidly. The last time they raised rates, as I said, was back in 2007 and in current dates, which has caused loads of volatility in the currency market. This volatility caused me to have substantial amounts of losses in a potential trade that involved the Yen, and I traded with absolutely no stop-loss, feeling the damages of doing so.
Here, the interest rate went from negative to a positive 0.1%. Throughout Japan’s history, their interest rates have been extremely low for quite a while, even dipping into the negative at times. But as you can see, here we are in 2024, and they are currently sitting at 0.1%. While that may not seem like a lot – it’s not even a whole 1% – the move it came from is quite drastic. We do expect several more, or at least one more, rate hike to happen in Japan, which will make things far worse on the carry trade side of things. Let me explain why this is bad for the carry trade and why it is causing strength in the Yen across a multitude of assets when paired against the Yen, like the Aussie-Yen trade I talked about earlier this week, which brought in tons of volatility and damaged my $50,000 account.
The carry trade goes wrong when there is a difference in the interest rate rising, as I just showed you on the chart. What happens is that the Yen becomes your liability if that’s where you’re borrowing the money from. In this example, for a carry trade, you’re borrowing from Japan in Yen, so the Yen is your liability. The foreign currency you’re borrowing is your asset because you’re getting paid on the interest rate of that different currency. Now, when that interest rate changes and goes up – in this case, up – you’re short on the amount of Yen that you have, so your liabilities and asset balance is off. You now have to find a way to get more Yen in order to pay back that liability.
What happens next is that you have tons of sell pressure from the other assets, whether that be their currency, bonds, or whatever it may be, back into the original liability, which was the Yen. This causes a massive influx into that currency. That’s number one.
Number two: when you raise rates, it typically strengthens a currency. So, you have the unwinding effect of all these hedge funds and institutions that took large sums of borrowed Yen and found yield in other locations, but now it doesn’t make sense anymore because of the increase in the interest rate. They have to offload all of these assets back into the Yen, causing not only a surge in the strength of the Yen because all this capital is coming back to get out of their positions so they don’t get margin calls and take a bigger loss than necessary, but also the effect of the higher interest rate. The effect on the Yen is actually doubled.
As I mentioned, the way the BOJ (Bank of Japan) has been speaking, they are definitely more interested in raising their interest rates. Now, I’d love to look through some charts and show you exactly how the Yen’s strength is being demonstrated and go over the exact trade that caused me massive amounts of damage.
Okay, so here is the Aussie-Yen pair. On this chart, we see the dramatic strength in the Yen. The reason why it’s strong is because this is a pair—on the left, you have the base currency, and on the right, you have the quoted currency, which is the Yen. So, anything going to the downside on this chart indicates that the Yen is stronger than the Aussie dollar, with the Yen being the quoted currency.
Now, looking at this chart from when they raised rates, with CPI coming out high and all these other factors impacting it, you had a total move of 14%. While that may not seem drastic or too much, depending on what market you’re exposed to, the last time we saw anything like this was back in 2020 during COVID. It’s been 4 years since we saw anything remotely close to this. In fact, while COVID did have a bit of a crash in terms of Yen strength, we can’t even compare the amount of volume on this drop. As you can see, these candles to the downside were quite scattered and broken up, with wicks on them, indicating that there was some buying pressure happening. When you compare it to this here, there’s absolutely no buying pressure happening whatsoever. You have somewhat of a small wick over here, but it’s not even anything to indicate any type of actual strength coming in. In fact, the candle right after this one right here closed on the low.
That is probably as bearish as you can possibly imagine. Closing on a low means extremely bearish, just as closing on a high would mean pretty bullish. Again, if I scroll back through history, we’re not going to be seeing 15% moves regularly. We have to look many years back through the data to even find a move like that. Here’s another one: back in 2013, we had another 14% drop. The last time we saw anything beat this move was back in ’08. Of course, we all know 2008 and its historical recession, which caused the Yen to strengthen a dramatic amount in comparison to the Aussie dollar, leading to a 46% swing in this pair.
Now, I want to touch a little bit more on the carry trade unwinding. I did a simple Google search on the Yen carry trade, just asking what it’s all about, and the first thing that came up was a CNBC article. But before I get into that, let me just read the top of this for you:
“The rising Yen has fueled speculation about whether this could mark the end of the popular so-called carry trade, wherein an investor borrows in a currency with a low interest rate, such as the Yen, and reinvests the proceeds in a currency with a higher rate of return.”
Again, another example of the carry trade. Now, let’s go ahead and see what CNBC has to say about this:
“An implosion of the carry trade: U.S. stocks kicked off the month sharply lower. The fresh data prompts fears of a worsening economic outlook. The weak data led investors to worry that the Federal Reserve may be behind the curve in cutting interest rates to fend off a recession.”
And again, just as I started the video, how I said it’s no secret that all markets are experiencing some extreme volatility right now, let’s actually look at the S&P to see what CNBC is talking about.
Here we are. I have the S&P 500 pulled up for us to look at. As I mentioned, it’s not only the currency markets that are experiencing this type of volatility—it’s coming through a multitude of different asset classes, and the S&P is a great example of that. Let’s go ahead and grab our measuring tool and measure from the high down to the low, which is a 7% move to the downside on the S&P 500 since the Bank of Japan decided to raise rates. Like I said at the beginning of this video, it’s affecting a multitude of different asset classes. Let’s go ahead and look at Bitcoin since they decided to change these rates. If I grab the tool from the high to where we are currently, we are now down 24% on Bitcoin, which is absolutely insane.
Now that you have a better understanding of what the carry trade is, how it works, and what the risk is—specifically the unwinding part—the question is, what do we do moving forward? Well, I can tell you what I’m going to do. What I’m going to do is actually limit my software’s activity. This is not financial advice whatsoever, but I will be, and I already have, taken off a lot of the Yen pairs because I want to stay away from any potential volatility like I experienced before.
One, I’m going to be using stop losses across the board. I think I’m going to set them around 15% of the total account balance. Two, I’m probably going to be turning off auto trading when we have these dramatic swings in the market due to fundamental news that comes out, like an interest rate hike and a high CPI. Those are things I don’t really want to be part of because you can’t predict which way the market’s going to go. If you’re already in a position and the volatility goes against the position you’re in, unfortunately, if you don’t have a stop loss, you will feel the pain of that, and I don’t want anyone to feel the pain of that.
Now, I can never give financial advice, and none of this is financial advice. This is solely what I’m doing—it’s merely just what I’m doing to protect myself and for your entertainment. If you like this video and you’re interested in finding out more potential upcoming news releases that could affect markets across the board, please leave a comment, like, and/or subscribe.
And as always, my friends, peace!
Please visit Yen Carry Trade Unwinding Is Causing Markets To Bleed! to watch the full video on YouTube!
