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Another 25bp Rate Cut! What's next for the market?
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Cantom joined discussion · Sep 14 19:22

Yield Curve Uninversion & What Is to Come : Carry Trades

As the inverted yield curve resolves, the unwinding of yen carry trades will accelerate.
I always say that when the yield gap between U.S. and Japanese 2-year bonds narrows, the yen strengthens. If this yen appreciation turns into a trend, the carry traders will face increasing foreign exchange losses. This, in turn, lowers their risk appetite for carry trades.
By the way, the resolution of the 10Y-2Y inverted yield curve is driven by a bull steepener led by falling 2-year yields, so it can also be seen as the starting signal for a yen appreciation trend.
Back to the point, as carry trades unwind and the number of risk-takers decreases, the upward momentum in the market tends to weaken.
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  • Boris Johnson : USD will go back up (rebound) after the testing 138. if not worse, 131

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  • Cantom OP Boris Johnson : Hey, thanks for the comment [undefined]

    Yes, I see a resistance around 140 as well based on my technical analysis.

    By the way, looking at much longer term, I expect USD/JPY hitting below 100 with US02Y 1.00% and the yield gap between 10y & 2y being 2.50%, unless long term yields gaining momentum upwards, which I don’t think very likely with the current CDS level.

    We are still at the very beginning of the rate cuts. Let’s see how it plays out [undefined]


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  • Ghost2737 Cantom OP : When do you think this might happen? I see 140.30 as the last resistance before breaking lower.

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  • Cantom OP Ghost2737 : Hi! Telling when is the last thing I want to do, but it should take more than one year before that happens. [undefined]

    There are quite a few events for JPY to reach that level such as; Credit crunch, liquidity crises, demand destruction, QE etc…

    The Fed is covering up the banking crisis with BTFP, and excess liquidity from which you can tell historical amount of Reverse Repo. I suspect the Fed is unofficially allowing banks to do installment repayments, looking at the current repayment pace of BTFP. [undefined]

    Also the government is buying back treasury bonds to add more liquidity to the market against QT. They are too afraid of what is to happen next[undefined]

    Anyways 100 level needs to be backed up by negative economic events. I expect the leveraged loans will completely ruin the Fed and the government’s plans.[undefined]

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Cantom
Real Time Fundamental Data Analyst, specialized in treasury bonds and options.
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