On August 5, 2024, on the streets of Tokyo, a pedestrian walked past the display board showing the morning data of the Tokyo Stock Exchange.
Richard A. Brooks | AFP | Getty Images
The rapid sell-off in “carry trades” continued on Monday, with market participants looking to unwind the popular strategy amid a sharp sell-off in global risk assets.
A carry trade is an operation in which investors borrow money in a low-interest-rate currency, such as the Japanese yen, and reinvest the proceeds in higher-yielding assets elsewhere. This trading strategy has become very popular in recent years.
Traditional safe-haven assets such as the yen and Swiss franc surged on Monday, boosting guess Some investors are looking to quickly sell off profitable carry trades to cover losses elsewhere.
“You can’t unwind the largest carry trade the world has ever seen without breaking some heads,” Kit Juckes, chief currency strategist at Societe Generale, said in a research note released on Monday. .
On April 29, 2024, on a street in central Tokyo, a man looked at the window of a money changer, which displayed the exchange rates of various currencies against the yen.
Richard A. Brooks | AFP | Getty Images
Jax said the latest batch of weaker-than-expected U.S. economic data, including Friday’s labor market report, manufacturing data and some other soft indicators, triggered a “huge reaction” in a thin August market.
“That’s an easy one to understand. The harder question is what happens next,” he added.
Juckes pointed out that the biggest reaction in the foreign exchange market is still to “lighten positions.” Long positions in the Australian dollar, British pound, Norwegian krone and U.S. dollar against the Japanese yen have all been cancelled, he said.
Juckes said a drop below $140 for the yen against the dollar “would be unsustainable” in the short term given the impact on stocks and inflation.
Consultants say yen ‘carry trade’ is not dead
The yen has risen sharply against the dollar in recent weeks, trading at 142.17 yen per dollar at 1:30 pm London time on Monday. This is in stark contrast to the eve of the July 4th U.S. holiday, when the yen fell to It rose to $161.96 for the first time since December 1986.
In addition to weak U.S. economic data, disappointing profits from major technology companies and a tougher stance from the Bank of Japan exacerbated the stock market’s rout in August. Changes in Japan’s monetary policy have prompted one strategist to warn that the yen carry trade will “collapse” in the short term.
In addition, Russell Napier, co-founder of the investment research portal ERIC, said in his recently released “Solid Foundation” macro strategy report that investors now understand the possible impact of changes in Japan’s monetary policy on the U.S. financial market.
Ed Rogers of Rogers Investment Advisors said that despite the deepening stock market sell-off, the yen carry trade is not dead yet.
“I think there’s definitely going to be some brief panic in the yen carry trade. I don’t think it’s over. I don’t think it’s dead,” Rogers told CNBC’s “Asia Roadmap” on Monday.
“There are still significant interest rate differentials to exploit, but … we can say that a lot of people are looking to cover existing positions and the yen carry trade is probably one of the ones that people are scared of,” he added.
What should investors pay attention to?
Peter Schaffrik, global macro strategist at RBC Capital Markets, said on Monday that credit spreads should be top of mind for investors in the coming weeks.
“I would also say that people generally thought in the summer that these positions would do well. It’s any type of carry trade, say credit or sovereign markets…Bond volatility has been rising, so how far will they go? Shavelik told CNBC’s “European Roadmap.”
He added: “I think people generally come across these things when they’re looking forward to a quieter period, but now we’ve got everything. It’s something to be aware of.”
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