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« Khan Resources Inc: BUY | Main | Fronteer Development Group: A Twin Pronged Assault »
Monday
Mar052007

Uranium: The Effect of the Yen Carry Trade

The Japanese economy is improving therefore in order to control the rate of growth the Bank of Japan will tinker with interest rates.

To kick-start the economy the base rate had been reduced to 0%, which had the effect of encouraging everyone to borrow money to invest into various projects and business ventures. The eagle eyed amongst saw the opportunity to borrow at a low rate and lend at a much higher rate of return in such currencies as the Turkish lire and the New Zealand Dollar. Both of these currencies have a much higher base rate thus generating nice profits for the traders. Those traders that have little aversion to risk have been more adventurous and taken a punt on the futures market or tried to maximise their returns via the use of highly leveraged derivatives. And good luck to them for being so brave.

Now the picture has changed slightly, the Japanese base rate has been increased form 0% to 0.25% to 0.5%, all of which appears to be fairly minor on the surface. However when you plot these three dots on a graph and draw a line between them you could spot an upward trend and conclude that the base rate will continue to rise. Therefore the benefits of the carry trade are coming to end. Its not just the narrowing of the gap between the interest rates of different currencies that has a diminishing effect on your returns, it is the strengthening of the Yen against those other currencies that also plays a part in making this particular play look less attractive.

So, as always the borrowings need to be returned. The trader now has to devise a strategy to raise the cash and reduce his Yen borrowings. He may decide to keep his position in other currencies for now and raise the required funds by selling his stocks and shares. So we have a situation where stocks that are clearly in an upward trend are being sold off to raise the cash in order to repatriate funds to Japan.

Add this to the China’s wish to try and curtail their rampant economy ergo the need for energy could be reduced taking the upward pressure off uranium. Well that could be one view, however it is not our view.

We first thought that this volatility would last for a few days and end with the end of week, last week. However the overnight markets in China and Japan have experienced more selling which has continued in London this morning with the Footsie being off about 100 points at the opening bell.

We will watch the North American markets later today with the view to spotting an entry point for two uranium stocks that we are about to put our hard earned cash into. This may not be the very bottom but these two stocks have corrected and we see it as an opportunity to buy. If we think that the opportunity is there to buy these two stocks you will be the first to know.

Keep calm and rationale about your investment decisions.

05 March 2007


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Reader Comments (1)

Yes, I kind of wondered about your comment that you thought last Friday might be the end of the sell-off. Never underestimate Mass Psychology. But I think we have to look at the Yen Carry Trade as a contributor, adding it to the Shanghai index drop. And I thought up another angle, but I'm not that smart economically. Here is my idea. When the BOJ raised the bank rate to 0.50%, it caused the Yen to appreciate against the US$ (probably a lot of the carry trade money got converted to US$'s). Well, the best way to stop the US$ from falling further might be to have Central Banks sell their gold reserves, thereby forcing gold down. When gold falls, the US$ generally rises. There are events occurring behind the scenes that us ordinary people can only guess at, but it is clear that the US rarely sells it's gold reserves, preferring to get other central bankers to sell theirs. I don't know why they would do this for the USA, but it might be as simple as they have their own currency backed by the US Dollar (fools, if it's true). Therefore, helping to strengthen the greenback is in their interests, too.
Bob G.

March 5, 2007 | Unregistered Commenterstoneygulch

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