In the last few days much has been made about the Euro going through 1.50 against the US Dollar. I am more concerned about the systemic risks posed by the recent strength of the Japanese Yen as it may lead to a rush for the exits on the Yen carry trade.
The accompanying chart is an index (31 Dec 2000 = 100) of a equal weighted basket of high yielding currencies (New Zealand Dollar, Mexican Peso, Indonesian Rupiah, Turkish Lira and Hungarian Forint) against the Japanese Yen as an pedal-to-the-metal version of the Yen carry trade. The index hit all-time highs in the July 2007 but have fallen about 14% since then and is reaching a critical technical support.
Hedge funds and currency traders who put on such trades tend to be highly levered and they are not well capitalized enough to withstand large losses. In such instances everyone becomes a technician and chart reader. I am sure that there are many stop loss orders placed just below the support line. Should the Yen strengthen further against these high-yielding currencies and these stops are hit, it would be pandemonium as everyone rushes for the exits, leading to a highly disorderly re-pricing of risk by the markets .
If that happens, this risk-avoidance contagion could very likely spread to other markets. Watch out below!
Welcome to my blog Humble Student of the Markets. These are my observations and musings about the markets (mostly equities), hedge funds and investments in general.My experience has been a quantitative equity manager in US, Canada, EAFE and Emerging Markets and commentator on hedge funds and their returns patterns.
This blog is produced by Cam Hui. Although I am a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"), this blog is prepared by me as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.
Mr. Hui has been involved in the equity markets since 1980, both on the buy side and the sell side. He serves as the portfolio manager principally responsible for making investment decisions for the Qwest Inflation-Deflation Trend Allocation Class of QE Funds Corp. He is also a director of Qwest Investment Fund Management Ltd and a CFA charterholder.
Mr. Hui has presented numerous papers to quantitative discussion groups. Sample topics include: How Global are Resource Sectors; Hidden Biases in Quantitative Models;
and Hedge Fund Replication.