More on the Yen – Peso Spread

by | Apr 7, 2001 | Archives

There have been some really good questions about the Multicurrency Sandwich. My replies are shared below.

Dear International Friends,

Here are some of your good questions that can help enhance your wealth.

Question #1:


“I find the subject of currency sandwiches and positive carry most fascinating. Jyske bank have sent me their details and I’m currently considering what currencies to use. Do you still recommend a peso/yen mix or are there other options?


Answer #1:

“I do not recommend specific positions. Every investor has different knowledge, wants needs and desires. Every investor should have a different position. To be successful speculating this way you need parameters for entering and ideas when to exit as well. If you invest in something you don’t know you need a template of thought or you’ll never be comfortable with the investment. You’ll always be wondering. Should I buy more or sell out? This is not real wealth. I really learned this when I first advised borrowing yen in 1994. The yen was 108 yen per dollar and then it rose to 80 before falling to 146! This is a huge fluctuation., Because I had followed the yen for 30 years I felt that 120 was the parity where the yen should be. I looked at the rise to 80 yen per dollar as an extra opportunity. My gut feeling said it would once again fall. This gave courage to my convictions so I held on and did really well. Others who had followed me into this investment did not have this conviction. They looked at their paper losses mounting and panicked. They bailed out and lost from a position that turned into a fortune.

Having shared that thought, Lets look at the yen. Japan’s economy remains in a mess that has lasted over a decade because the country refuses to change traditional ways that make much of the nation (unlike its export sector) unproductive.. The Bank of Japan, Japan’s Central Bank has cut interest rates to zero to stimulate the economy and have said that they will keep rates there until the economy recovers. The bank has also promised to increase the money supply.

Many politicians want the bank to print lots of money to create inflation. Inflation will make it easier to resolve the tons of bad debt in Japan and would push the yen lower. Inflation would force consumers to buy now before the value of their savings are eroded. This might kick-start the economy. If this happens the yen is likely to fall in value which makes it a perfect currency to borrow. You get a low borrowing rate and a forex profit too.

But there is by no means a guarantee that Japan will stick with this tactic. Political conditions are as troubled as the economy. The current Prime Minster is not likely to last in office for more than a month.

Though we are not guaranteed the yen will fall, at its current parity of 125 it is about where one would expect in its long term trend. At worst one could expect the yen to not strengthen significantly.

On the other hand keep some facts in mind. The yen has risen in the past as high as 80 yen per dollar. Wherever it has been, it can go again. If you decide to borrow yen (as I may well do myself), calculate your potential losses as far as 80 yen per dollar, so you know how much you can lose as well as gain. If you cannot afford that loss, do not use this technique!

The yen is unlikely to rise against the U.S. dollar, but could the peso devalue against the dollar (and hence the yen)? The peso has fallen from 9.28 pesos per dollar last year to 9.52 pesos this month. The upside of investing in the peso is that three month government bonds currently pay 18%. This means you gain a huge positive carry (about 16% which if leveraged four times amounts to 54% a year on your collateral at risk)!. The downside is that the high interest rate is because the investment community feels that the peso is at risk. Mexico’s foreign reserves have risen since last year from 33.6 billion to 39.4 billion. This is good but the countries trade is in deficit 8.6 billion in the last year and the current account is a negative 17.4 billion, which is bad.

Inflation is also running at a rate of 7.1% compared to the U.S. rate of 3.5%. This would suggest a 3.6% fall in the peso over the year. All Latin American economies are likely to be damaged by the slow down in the U.S. If Mexico suffers from this a likely solution to step up exports to the U.S. would be a devaluation so that Mexican goods costs less. Mexico is currently rated as the 13th riskiest economies by the Economist Intelligence Unit (based on political structure, economic soundness, state of banking system and sovereign debt risk). It is listed as safer than Venezuela (12th riskiest) and Bolivia (11th), but is less safe than Iran, Argentina, Philippines, South Africa, India, Thailand, China and Egypt. You should calculate the risks of a 12% to 20% peso devaluation into your risk reward analysis as well.

One way to reduce this risk is to have just a portion of the investment portfolio in pesos.”

Question #2:

“Before I order your course BORROW LOW, DEPOSIT HIGH I need to know the following:

1. Is there other banks beside Jyske Bank to apply the course principles?

2. What is the minimum amount I can start with?

3. Is Jyske Bank’s Zurich branch is as effective as the one in Copenhagen?

Thank you.”

Answer #2: “Most European banks, especially in Switzerland, Luxembourg and Austria will lend in multiple currencies. You can get more information about this from eclub advisors Anglo Irish bank at – Andy Kaegi in Switzerland at and Teddy Christiansen at Jyske Bank can compare the differences in their Swiss and Danish services. His address is TEDDY@JYSKEBANK.DK. Borrow Low Deposit High lists dozens of banks that lend in multiple currencies. Every bank has its own minimum and its own collateral to loan ratio for different types of investments. Interest rates vary and the course explains why. Usually the minimum to start would be $15,000 to $20,000.”

Question #3:

“I looked at the parity of the Icelandic kroner and it appears that in the last year this currency has fallen in value versus the Swiss franc. Does this mean I would have lost money if I had borrowed Swiss francs and invested in this currency. “

Answer #3: The fall in the kroner versus the Swiss franc means that profits would have been reduced. If the drop was enough losses could have occurred if the position was closed. The key to the Borrow Low Deposit High tactic is magnified positive carry. Most currencies shift, over time, versus one another. For example the Swiss franc is currently about 1.7 francs per dollar. Yet at times The francwas has been as strong as 1.13. This is a huge swing. In most sandwich positions you want to take a long view and ride through such currency swings, always enjoying the positive carry as you do. In other words, when the yen went from 108 yen per dollar to 80 yen per dollar and then back down to 146 per dollar, I did not worry too much about the swings. I just kept earning more interest on my investments than the yen loans cost. When I exited at 146 yen per dollar it was because the yen was so weak I had to take the forex profit too.

The trick for maximum return is to invest in a currency (such as the Icelandic kroner) that is at a weak stage and has a high interest rate with a borrowed currency that is at a strong point and has a low interest rate. This is not always possible but when it is it is contrarian investing at its best.”

I cover this strategy in detail along with Jyske Bank at the upcoming Investment & Business Course April 25 to 28. Until then, good global business and investing!