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Friday, November 9, 2007

The Carry Unwind Accelerates


Yen Advances to 18-Month High Against Dollar as Stocks Decline: “The yen rose to the highest since May 2006 against the dollar as investors shunned riskier assets bought with loans in Japan. The U.S. currency erased its decline against the euro after dropping to a record low.

The yen climbed against all 16 most-traded currencies after stock indexes in Europe and Asia reversed gains and U.S. equity futures declined. Shares of Barclays Plc fell as much as 9.1 percent on concern Britain's third-biggest lender may announce a writedown of as much as 10 billion pounds ($21 billion). Wachovia Corp., the fourth-largest U.S. bank, said it may raise its allocation for loan losses.

“Risk aversion is coming back to the markets,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. “The writedowns from financial companies tell you that subprime is a significant issue and dealing with its hangover is going to take some time. The yen will continue to benefit.””

Translation: It is slowly starting to sink in that borrowing massive amounts of money in a declining, low yield currency and investing the proceeds in risky assets in high yield currencies can become a really significant problem really quickly when those risky assets don’t perform as intended.

The Carry Trade unwind is accelerating… global de-leveraging is in full swing now. Expect continued weakness in equities.

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