Odd Lots
Hyun Song Shin on How Big the Yen Carry Trade Really Is
Aug 29, 2024
Hyun Song Shin, an economic advisor and head of research at the Bank for International Settlements, dives into the intricacies of the yen carry trade. He explains how this strategy, involving borrowing low-yield currencies, has influenced recent market turbulence. Shin discusses the key players in this global dynamic and debunks common misconceptions. He also highlights the role of FX swaps in enhancing liquidity and examines how today's financial conditions contrast with stock market performance. Insightful and timely, he unpacks the lessons learned from recent events.
38:25
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Quick takeaways
- The yen carry trade exemplifies a complex financial strategy involving substantial borrowing in low-yield currencies to invest in higher-yielding assets, significantly impacting global markets.
- Market volatility is amplified by financial institutions' risk management practices, highlighting the need for better integrated approaches to mitigate cascading effects during stressful trading conditions.
Deep dives
Understanding the Carry Trade
The carry trade is a financial strategy where investors borrow in a lower yielding currency, such as the yen, to invest in higher yielding assets like US technology stocks. Recent discussions have broadened the understanding of carry trades, highlighting that various assets are involved rather than just currency pairings. The carry trade activity experienced a significant spike, with yen-denominated borrowing rising sharply to around 40 trillion yen, approximately 270 billion dollars. However, this figure doesn't fully encapsulate the extent of carry trading happening in financial markets, which often operates in conjunction with off-balance sheet transactions through instruments like FX swaps.
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