Probing the Carry Trade

The start of the week in Asia has been notable for the lack of commentary. Many asset managers, such as the usually outspoken Alex Wong of Ample Financial Group in Hong Kong, are not making official statements. After being downright chatty last week, other gregarious analysts held back on issuing research at the end of trading Monday.

As a knock-on effect, European markets were hit hard by selling early Monday. After hitting its lowest level in three months earlier in the day, London's FTSE was recently off 0.8%, as was the Paris CAC 40. The German DAX was recently off 1.2%, although up from its intraday lows as major U.S. markets attempted to rebound from early selling.

Some say the cause of the recent selloff is simply that Chinese assets were at inflated prices, and that this is an inevitable correction, given the overall lack of productivity vs. growth in the country. Others see the Chinese economy as perfectly healthy and as suffering from a credit squeeze caused by the soaring yen, which rallied sharply last week and hit multimonth highs vs. the dollar and euro intraday Monday.

This latter theory points to idea that market growth in the region was increasingly dependant upon a continuing "yen carry trade," where foreign banks were borrowing in yen and short-term exchange-traded contracts to finance rising investments in Asia and elsewhere.