Aussie Yen (Classic Carry Trade) Unwound

The Aussie/Yen Carry trade was the darling of Currency traders around the world until April 10, 2013.

The Bank of Japan announced their aggressive "Abenomics" driven plan about a week prior and then volatility in the JGB (Japanese bond market) picked up considerably.

In it's most rudimentary form the logic for the trade is borrow the cheap yielding currency (the yield on the 10 year in Japan is 86 basis points and it was as low as 35 basis points in early April) and hold the higher yielding currency. The 10-year yield in Australia right now is 3.25%

This became a VERY CROWDED trade and when something like that reaches capacity, the shakeouts can be vicious. This was no different. That said, I believe the Aussie Yen cross MAY HAVE BOTTOMED this morning just after our NFP release. From a trading standpoint, I think this rattled a lot of guys on either side of the trade (as well as the cross). I also believe old resistance around 90 will become support.

The Five-Year Look
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The Sept Japanese Yen futures (what guys would be short) moved from 96.50 up to 105.25 in short order. That's INTENSE currency vol and a 1 lot future move = $10,937.50. A ONE LOT.

The Sept Aussie Dollar futures (what you would be long in the cross) moved from 104.50 to 94 this morning (QUICKLY). That's $10,500 on a ONE LOT future.

Now imagine having the spread on....... That's how MARGIN CALLS HAPPEN.

Here's A One Year On The Cross
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I look at this and say.....the cross moved from 80 up to 105 and then gave back 15 points or 60% retrace. That's a healthy pullback from a TRADING standpoint.

We got a Goldilocks Nonfarm Payroll report this morning.

This stuff is RISKY. Following the Bank of Japan meeting in April when they promised to double their monetary base over the course of two years FAR TOO MANY PEOPLE believed you "had to be short the Yen". In my experience when people that have NO IDEA what they're doing pile into a market - you're likely to see a shake out.

Crowded rooms and small doors.

In other news, it looks like volatility crested yesterday around 1230pm with the VIX futures at 18 and the S&P future breaking the 50 day moving average only to see them catapult higher into the close.

Hopefully we don't find out the NFP number was "accidentally" released early (like the Fed Minutes or ISM recent releases).

With some clients we BOUGHT NATURAL GAS (front month) futures at 383 yesterday with 10 cent stops. Others sold 375 puts naked.

This morning with some clients we BOUGHT MINI SILVER around 21.85.

In markets I know very little about, the Aug. Lean Hogs appear to be close to high end of range. I would consider strategic shorts in there or possibly look at the Cattle Hogs spread (long Cattle v. short Hogs).

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