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WHAT THE F*IS HAPPENING THE MARKET 2.0

WHAT THE F*IS HAPPENING THE MARKET 2.0

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Hi guys, due to my recent busy schedule I haven’t been posting very actively but anyways I’m pretty sure some of y’all are wondering why the market kept fluctuating up and down lately??

In my previous post, I talked about the macro economics involving the US, interest rates and economy data that are affecting the markets globally.

Today, I’ll be talking about another factor that has hit the market hard and it’s called Yen carry trades.

❗️WHAT ARE YEN CARRY TRADES ❗️

as we all know, value of yen has been weakening against the US dollar and that’s why a lot of us Singaporeans were like “eh go faster go Japan, now cheap sia, the exchange rate damn nice”

And well the reason why Japan’s currency is low is because they’ve a negative or close to negative interest rate.

Which means you earn nothing or even make a loss by putting your money in Japan’s government debts (bonds) or bank account. This is because, Japan wants their banks to lend out money and people to spend more money rather than locking it up to rise inflation level since Japan’s economy has always been low in inflation and even went into deflation at certain point in time.

As such, many fund managers global started borrowing money from Japan and convert the currency to another currency to earn money. This is literally free money. Imagine you lend $1000 from Japan with 0 interest rate and then you convert to sgd and buy Singapore savings bond which offers 3% annual interest rate. 1 year later, when the bond matures, you earn the $30 and then you convert the $1000 back to yen and repay Japan bank at no cost.

So just imagine this but many many times more than $1000. And these mutual funds will leverage their positions with all the loans they take from Japan and put it into bonds, equities, etc.

❗️Bank of Japan decides to increase interest rate❗️

Finally after many years, Japan decides to increase interest rate to 0.25% overnight to curb the weakening of their currency against the US dollar. Especially since the US has been hinting at interest rate cuts soon, Japan needs to take action to ensure that their currency won’t further weaken against the US dollar which will affect many areas like trades and imports

❗️WHY did it affect the economy so badly ❗️

As interest rate increases, Yen appreciates sharply against the US dollar. Since a lot of yen carried funds leveraged their positions, this sharp appreciation triggers margin calls.

This is because

example, borrowing and converting to $1000 sgd from Japan used to be at no cost. However now that the interest rates has increased, when you want to convert the $1000 back to yen to repay your loan, it’ll maybe be worth $950. Hence, you made a $50 loss

And imagine if you leveraged your position by 10x and you’re making a 50% loss just by doing these yen carry trades

So imagine this at a much larger scale. Hence, a lot of fund managers start to cut funds, close their positions to deleverage. And when they repay back their loans, they’re buying more yen which made yen appreciate even higher. Hence, causing a massive sell off globally.

And when investors see the sudden drop in the market, they panic sell and hence, causing the large dip in the market

❗️What happens next ❗️

All these are very common guys, this is just central banks trying to keep the economy in balance and has nothing to do with the valuation or the future valuation of the companies you’re investing in. Hence, dollar cost average or hold your positions! Don’t panic sell!