What is a carry trade?
As the market is in a state of disrepair, there is a story that the Ncarry trade makes Ncarry Unwind crash the stock market and talks about it.
Encarry is a carry trade in which the yen is used as a funding currency. Then, what is a carry trade?
Usually, each country has its own level of interest, so some currencies have low interest rates and some currencies have high interest rates. For example, Japan’s interest rates are the lowest in the world and the United States is high.
A carry trade is a transaction in which Japan borrows yen and invests in the United States and Australia with high interest rates. And it is called carry because it carries maturity.
Then, it is assumed that the interest rate difference between Japan and the United States or Australia could be surpassed. However, if the yen strengthens, the interest rate difference between 4% and 5% may fail.
The negligence of the carry trade disappears if the risk of the exchange rate is hedging the risk of the exchange rate to avoid the currency risk, because of the interest rate equilibrium principle. Japan’s 0.1% interest rate and the US’s 5.37% interest rate have the same value. If you borrow from Japan and invest in US bonds and hedge them in the foreign exchange market, the interest rate difference disappears. This is because the forward market in the foreign exchange market is priced to make this interest rate difference zero. This is because each country’s interest rates are equal.
So, the yen carry trade is the exact definition of borrowing yen and investing in high-interest currency bonds.
To unwind this yen carry trade, you have to sell U.S. bonds, Australian bonds, buy the yen, and pay back the yen’s borrowings. However, bonds around the world soared in the midst of the commotion. The position was not liquidated at all, or it was liquidated quietly.
It is wrong to say that N-Carrie is the cause of the stock market crash.
What happened was that some hedge funds did it and almost all of it would have gone to the net after borrowing yen, including some big U.S. tech stocks. According to JPMorgan, 70 percent of these transactions were unwinded. (But JP calls it Carry, which is why it’s confusing.)
In other words, there were hedge funds that short-circuited the yen and bought U.S. stocks or bought Japanese stocks, but it was properly obtained this time, and I don’t think this will disrupt the market again.
They even carried on Warren Buffett’s investment in Japan this time, but Buffett brought dollar cash and bought Japanese stocks after buying dollar yen in the foreign exchange market. This is totally different even though the number of shares is different.