Trading Secret #83: Fade the Japanese Housewife
By Dr. Steve Sjuggerud
August 3, 2007

What does Mrs. Watanabe (Japan's version of Mrs. Jones) know about the New Zealand dollar?

My guess would be "not much."

But this hasn't stopped Mrs. Watanabe from buying a heck of a lot of New Zealand dollars lately…

On July 31, Japanese individual investors set a record… they borrowed more Japanese yen and bought more in foreign currencies than they ever have before.

Just think for a minute here… Do you think "Mrs. Jones" in America has ever considered actually borrowing dollars to buy Japanese yen? I know she hasn't… So what is Mrs. Watanabe doing?

I'll tell you what she was doing… Up until last week, Mrs. Watanabe was making money, and lots of it.

You see, the New Zealand dollar pays 7% more interest than the yen, so Mrs. Watanabe pockets that. In addition, up until two weeks ago, the New Zealand dollar seemed like a one-way bet – up. From March of this year to two weeks ago, the New Zealand dollar gained an astounding 20% versus the yen, with hardly a down move. Mrs. Watanabe thought she was a genius:

"You just need to buy [foreign currencies] on dips, then sell them at a profit," a Japanese woman told Bloomberg a few weeks ago, sounding as if the rest of us were foolish for not doing the same. "It's better than stock trading," she said. "You can rely on daily interest."

A few weeks ago, Kiyohiko Nishimura, a board member of Japan's equivalent of the Federal Reserve, actually said Japanese housewives (who tend to control family finances) are acting as a stabilizing force in the foreign currency markets. The currency markets are huge… that's a lot of trading from a lot of Mrs. Watanabe's.

Of course, it's not just Mrs. Watanabe. Here's what's been happening…

When big speculators around the world become fearless, they put "the carry trade" on… They borrow yen and buy New Zealand dollars (as one example of the carry trade). And when these big investors get scared, they take the trade off. (It's not quite that simple. But it's close.)

You can see it in a simple chart of U.S. stocks versus the carry trade this year. These two things in the chart should have no relation to each other… Why should U.S. stocks care about the New Zealand dollar/Japanese yen exchange rate? Yet they track pretty closely this year…

I think we're getting close to the end of the carry trade… for two reasons. One is rational and the other is emotional.

The rational reason we're near the end is, after the subprime mess, the big banks are tightening up their lending practices. Big speculators simply won't get the borrowing power to do the carry trade in the size they need to make big profits. The basic unwinding of carry trades will reverse the relationship between the Japanese yen and other currencies.

The emotional reason we're near the end of the carry trade is simple. We hardly ever get a better signal that a trend is near its end than when the Japanese housewives are doing it, and thinking it's easy money.

Like the dot-coms in 1999, or U.S. real estate two summers ago… when everyone is doing it and thinking you can't go wrong, the trend is near its end. Sorry, Mrs. Watanabe…

Good investing,

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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