On Wednesday (August 7th), the Nikkei 225 index rose further shortly after opening, with an early increase of over 3%. At the same time, in the foreign exchange market, the US dollar against the Japanese yen also further strengthened, with the highest level of 147.50 for the day
In fact, we have provided a detailed introduction to the correlation between the recent fluctuations in the Japanese yen, Japanese stocks, and even global stock markets in our article "Unveiling the Hidden Drivers of Global Stock Crashes: Arbitrage Trading's' Disappearance '". At present, a major focus of the Japanese financial market is actually whether the "big picture" of arbitrage trading is about to end.
If the "Great Purge" ends, the previous sharp decline in the Japanese stock market may come to an end, and the abnormal surge in the Japanese yen exchange rate is expected to ease. However, if the "Great Purge" continues, there may still be an uncertain "second half" of market volatility
Regarding this, some Wall Street institutions, including Xiao Mo, are still relatively pessimistic at present. As we previously reported, Arindam Sandilya, Co Head of Global Forex Strategy at JPMorgan, stated that the "yen arbitrage closing" that has caused a stock market crash in the past few days may still be far from over.
We believe that at least in the speculative investment industry, the closing of arbitrage trades may have been completed by 50% to 60%, "Sandilya said in a media interview on Tuesday. He also stated that the Bank of Japan may continue to slowly raise interest rates as the country's borrowing costs are "far from reaching" levels that match the real economy.
However, Goldman Sachs currently seems to have a different perspective.
Goldman Sachs: Arbitrage trading 'big market' is coming to an end
Goldman Sachs trader Anton Tran believes in a latest report released on Tuesday local time that the pressure to close short positions in the yen has actually been largely eliminated, which means that the "pain of arbitrage trading" is about to end.
Here is Goldman Sachs' latest view on arbitrage trading positions from five dimensions:
Position rating: Goldman Sachs' forex team's position rating shows that short positions in the Japanese yen have been largely liquidated, and the current position is slightly bullish, indicating that the market may be close to bottoming out.
Retail positions: As of July 23, data shows that short positions in the Japanese yen have reached a historic high, with leverage of approximately $5 billion. Goldman Sachs believes that it is these positions that have accelerated the decline of the US dollar against the Japanese yen, as it will involve additional margin; However, the foreign exchange sales counter of the bank believes that 60% -80% of the positions have been liquidated by the previous decline.
Japanese life insurance company: The bank believes that there will be no capital backflow in Japanese life insurance companies because it is difficult for them to tactically increase hedging ratios.
Trader: The short gamma position held by traders due to the purchase of put options by Japanese insurance companies is another factor causing the decline of the US dollar against the Japanese yen, especially around 142-147.
Pension Fund: Goldman Sachs estimates that pension funds need to implement a $12 billion buy US dollar sell Japanese yen transaction to rebalance, which will further alleviate the downward trend of the US dollar against the Japanese yen.
Undoubtedly, compared to other Wall Street institutions such as Morgan Stanley, Goldman Sachs is more optimistic about the schedule for closing arbitrage trades, and the bank is also more optimistic about downstream affected assets such as the Nikkei index.
Goldman Sachs' trading desk believes that the current fundamentals make the Nikkei index "very attractive" at the moment. Although the research strategy team of the bank still maintains a cautious attitude, believing that the short-term outlook is still uncertain and may face further liquidation, it is expected that there will be some uncertainty in the future macro environment (economic growth, yen exchange rate, US economy, etc.).
Of course, Goldman Sachs also mentioned the biggest problem that Japanese assets are currently facing in the end: who will be able to take over and buy Japanese assets in the future - overseas investors have already suffered losses, and retail investors are also struggling. Can there be more buyers emerging in Japan to take over?