March 18, 2011 – Stopped Out of My Yen Short

Featured Trades: (STOPPED OUT ON MY YEN SHORT), (FXY), (YCS)

 

2) Stopped Out of My Yen Short. My standing stop loss order to cover my short in the Japanese yen got triggered right as it dipped under ¥80, a new all-time high. The massive flight to cover huge yen carry trades is the cause, as the world rushes to cover short positions in the yen and sell everything else. These positions have been building up for 20 years, ever since interest rates for the yen fell below those for the rest of the world.

If you are going to lose money, this is the way to do it. Of the 21 positions taken on by the Macro Millionaire program since inception, this has been the smallest one. As it fell, I never doubled up, fully aware of the potential of the Japanese yen to make this kind of spike move against us in the wake of the Great Sendai Earthquake.

The government tried valiantly to stem the appreciation with massive intervention in the currency markets, buying some $186 billion on Monday alone. But it was to no avail. I can imagine that the guy in charge of yen intervention is sitting outside the prime minister’s office stewing, while the leadership tries to figure out how to extinguish the nuclear fires. The country is truly not functioning now.

If anything, the yen at ¥76, the high so far, will cause more damage to Japan’s economy that the earthquake did, making the argument for a weak Japanese currency even stronger. But as the great economist, John Maynard Keynes, said so eloquently, ‘the markets will remain irrational longer than you can remain liquid’.  But at this stage, I would rather watch from the sidelines than ride this bucking bronco until those in charge make the right decision.

So it is better to stop out and live to fight another day. Let’s just hope the next battle isn’t a Waterloo.

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