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Y C T Threat Re-emerges, Again

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Appreciating Yen Could Cause Trouble For Equity Markets
Posted on Jul 25th, 2007 with stocks: DBV, EWA, FXA
Gary Gordon submits: Regarding the stock market's run-up, a great deal of credit has been given to merger mania. What's more, some predict that when the buying frenzy dries up, the stock market will drop precipitously. However, some attention might be given to the so-titled "yen carry trade."
This refers to the practice of borrowing the Japanese currency at a very inexpensive rate (0.5%) and investing in high yielding instruments of other countries. Many invest in the US currency (5.25%), British pound or New Zealand dollar (8.0%).
Of course, borrowing in yen makes it easy for some companies to buy other companies as well, making many of the buyouts possible. What's more, investors can also borrow or short the yen to invest in all kinds of assets.
This begs the question: Have the stock markets around the world been propped up by the carry trade phenomenon? It's difficult to give any other answer than, "Yes."

The Yen is rising and the Japs are long overdue in economic cycle terms. If* the YCT unwinds IR may begin soaring along with credit markets tumbling as cheap money vanishes overnight. Perfect storm for house prices.


* If.

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``The yen-carry trade and some kind of misalignment among major currencies is not good for the global economy,'' Korean Finance Minister Kwon Okyu told CNBC from Sydney yesterday. ``This time, I would like to discuss this matter with colleagues and hopefully we can do something.''

To those familiar with the winks, nods and secret handshakes of the currency markets, that means Asia's No. 3 economy is fed up with the weak currency of No. 2.

:o Bloomberg's language surprises me more and more.

Edited by Goldfinger

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