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The Land of the Rising Yen, or Derivatives blow-up!

The McAlvany Weekly Commentary (or currency roulette)

Some ask the question: “Why is the yen rising during a period of time when Japan is at one of its greatest crises?”

(excerpts)

The G7 do not want the yen to appreciate any more. As far as the tens of billions that are going into this yen intervention, what you have is a purely self-serving phenomenon.

The bottom line issue is one in the derivatives market, and what could have been last week, and still remains an issue of complete destabilization within the financial system.

http://mcalvanyweeklycommentary.com/march-23-2011-the-land-of-the-rising-yen/

Whether you’re talking credit default swaps related to interest rates, credit default swaps or other derivative products relating to just market volatility in general, many derivative products are used to protect against default, protect against extreme price moves, essentially insurance on the core investment. If volatility exceeds that anticipated level, then the derivative contracts require an insurer to pay the insured.

It almost seems that what we could have had was another financial crisis like we had in 2008, where all of a sudden you have these derivatives at risk again, and it was all based on this initial rise in the yen, the need for liquidity.

– If we reach a certain critical point, it will be because we got there in a time frame which was too short for them to hedge it out, for them to create another insurance on the insurance product, a layered derivative upon a derivative. In fact, it was the rate of change which got ahead of them.

– The United States is actually a pretty darn good place to borrow right now, as long as all those variables that you talked about before do not start kicking in.

– The stability of a dollar carry trade has everything to do with our interest rates. They need to stay low. If they do not, we got a problem

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