Carry trade and why the Yen appreciates agaisnt the greenback?

CFA Level III Economics
#1

Question: Is this the correct logic to the bold section in paragraph (B) below?

My logic for the paragraph below is that the yen depreciates, and here is why:

  1. Japan is a net importer of oil, and the US is a net exporter.
  2. When oil prices decrease:
  • the USD increases as the Japanese demand more USD to buy more oil (selling Yen / buying USD).
  1. This would cause the yen to depreciate, not appreciate.

Apparently, this is the incorrect logic.

(B) Paragraph:
Japan is a net importer of crude oil, and the US is a net exporter: guess what happens to USDJPY when the price of oil goes down rapidly?

USDJPY goes down: the Yen appreciates because the terms of trade for Japan become more favorable.

Can someone help me piece this together.

Thanks!

#2

Where’s this question?

#3

I revised the question. Is it clearer?

#4

Sorry; what I meant is: where did you get this question? Curriculum, LES, prep provider?

#5

An article not from CFA curriculum.

#6

When the price of crude oil goes down, the Japanese can buy more crude oil for the same amount of yen, which is worth more.

Is this mean Japanese want to stock up on crude oil taking advantage of the appreciation of yen?They wouldn’t like to buy more crude oil if yen is depreciated because the price would be higher.

#7
  1. Japan is a net importer of oil, and the US is a net exporter.
  2. When oil prices decrease:

** the USD increases as the Japanese demand more USD to buy more oil (selling Yen / buying USD).*
**I don’t think is correct. Japan want 1m barrels of oitl at $100. Need $100m oil drops to to $50 a barrel they now only neeed $50m. The Japanese demand less USD, JPY appreciated USD depreciates.

1 Like
#8

This makes sense, but what’s tripping me up is the inverse relationship between oil and the USD. When oil goes up, the USD moves down, and vice versa. This is how I understand it, given that oil is priced in USD.

#9

The questions says

This is saying oil price down, demand foe dollars down (as oil priced in USD and Japanese don’t need as many USD to buy the oil they need).

1 Like
#10

Thanks for make it clear, MikeyF! Happy Holidays! :fist_right: :fist_left:

#11

Where is the question?

#12

The carry trade is a popular strategy in forex markets where investors borrow money in a currency with a low interest rate and invest it in another currency with a higher interest rate. The goal is to profit from the interest rate differential, or “carry,” between the two currencies.

One of the most well-known carry trade pairs involves the Japanese yen (JPY) and the US dollar (USD). Historically, the Japanese yen has had very low interest rates, often close to zero, while the US dollar has had higher interest rates. This interest rate differential makes the USD a popular choice for investors seeking higher returns.