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- 13 February 2006
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clowboy said:
The Bank of Japan has had their discount rate @ 0.00% for a number of years, it then rose to 0.025% last year sometime [or year before] and rose to 0.05% in the last 3 weeks.
Therefore you can borrow Yen @ 0.00% interest and invest it somewhere else for an arbitrage return.
Hence currencies like the NZ$ went through the roof due to NZ higher interest rates.
Commodities futures would normally trade in backwardation, thus you could roll the contracts for a positive yield. Hence massive speculation into commodity markets forcing them into manic bulls. So much so, they went contango.
The more aggressive would place the funds in equity markets, China, India, ASX, anywhere that had a bullmarket.
So to borrow Yen, in essence you *sell Yen short*
Now that Yen is rising, the spread is closing on other currencies, thus the profit is reducing.
To keep the Yen *undervalued* constant selling and reinvestment was required..that's finished, and in addition the traders in existing positions are exiting, and buying Yen to close their *short position*
No selling, and huge buying, unwinding some 10yrs worth of positions.
Those that went into the futures markets before they went contango, pulled out prior, thus the falling commodity prices.
Now we are seeing the equity portion fall out of bed.
The next will be Junk bonds, then Treasuries.
The Treasury market will be balanced by the *Flight to Safety* so probably won't be as brutal, unless the Fed starts to ease.
If they ease, then you'll see more unwinding out of Treasuries as well.
That's more or less the basic gist.
jog on
d998