One of the hottest trades in the world is shorting the yen.
The idea is that the new government is eager to stimulate (both through fiscal and monetary policy) and that the yen will weaken.
It’s been a good bet since last autumn.
Last week on CNBC Mark Cuban said that he’s taking on the bet in a big way.
…in early December, I went and took every penny of debt that I had – with the Mavericks, and personal debt, and everything – and converted it to a yen loan, when I think [the yen] was in the mid 80s [against the dollar]. So, I’ve been really happy with it.
The key thing to bear in mind is that borrowing in a given currency is like shorting it, because you win if it goes down (because then you have less that you have to pay back). If the currency strengthens, then you lose money.
So we followed up with Cuban to ask him more about his big bet, and why.
Via email he simply explained the logic:
The Central Bank of Japan wants to create inflation and push the value of the yen down. Given what is at stake for them, I thought they would be able to at least have some directional success,which would provide me a return. In addition the actual interest rate on the note was lower than what I could borrow in dollars.
We asked him, in a followup, how long he will hold onto the “trade,” and whether he’s done something like that before.
Yes, I would anticipate keeping it in Yen until/unless there is a fundamental change in the yen.
And this is the first time I have borrowed in a foreign currency, but not my first big play . Right after the financial meltdown I went huge in Australian Debt. I told my wife if this went against me we were moving to Australia, but it worked. It was 85 I believe and now its 103 or so. But most likely I will just hold till maturity of the debt and convert. If there is a fundamental change, I can hedge, which I can do with the Yen as well.
I don’t want to sound like a currency expert. I’m not. I don;t trade in and out of currencies at all. I do believe that there is a ton of unquantifiable risk that is introduced by stock exchanges and dark pools that doesn’t exist with currencies.