The Bank of Japan is widely expected to keep interest rates steady at the end of its 2-day meeting ending on June 14, 2024.
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Kathy Lien, managing director of FX strategy at BK Asset Management, said the unwinding of yen carry trades is expected to continue in September, raising the risk of another large-scale sell-off.
Lane predicted on CNBC’s “Squawk Box Asia” on Monday that downward trends in U.S. Treasury yields and the dollar would continue to push the yen higher.
“We’re already seeing risk aversion across financial markets, which will lead to continued unwinding of the carry trades we’re already seeing,” Lane said, adding that yen traders will be watching stock prices and taking cues from them. September is typically a volatile month for the stock market.
“If the stock market does sell off significantly, perhaps there will be more aggressive unwinding, like we saw in August,” she said.
A carry trade is the practice in which investors borrow currency at low interest rates and then reinvest those proceeds into higher-yielding assets elsewhere.
“I think there’s a lot more that can be mitigated, especially if you look at how undervalued the yen is. That’s going to change valuations over the next one to two years. That’s going to have a spillover effect,” Richard Kelly, TD Securities Global Strategy executives told “CNBC Squawk Box Europe” last month.
The yen has become one of the world’s largest carry trades as the Bank of Japan’s negative interest rates have caused the yen to plummet against other currencies.
This carry trade began to unwind after the Bank of Japan raised interest rates in August, triggering a rise in the yen and a sharp sell-off in global markets.
Some analysts estimate that yen carry trades could total as much as $4 trillion following August’s rout. Reuters.
While markets slashed losses following the sell-off, Lane warned there was a risk of a repeat as investors focused on stock market prices and the U.S. economy faced growing headwinds.
Wall Street indexes fell on Friday, with the S&P 500 recording its worst week since March 2023 after a weak August jobs report.
“I do believe that there could be a period of significant sell-off in stocks this month, especially as the U.S. economy moves in the direction that many central bankers fear.”
Japanese Nikkei 225 Index Asian stocks led losses on Monday as the country’s second-quarter GDP fell short of analysts’ expectations.
However, slowing GDP growth may limit the Bank of Japan’s options for further interest rate hikes.
—CNBC’s Sam Meredith contributed reporting.
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