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.
In an interview with CNBC “Squawk Box AsiaOn Monday, Lane predicted 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 I’m thereThere are plenty of places to relaxespecially if you look at how undervalued the yen is. This will change valuations over the next one to two years. There will be spillovers,” Richard Kelly, global head of strategy at TD Securities, told CNBC “European Scream Box”,”last month.
The Japanese yen has become one of the currencies Biggest arbitrage trade The Bank of Japan’s negative interest rates have caused a sharp devaluation of the yen, something the world has never seen before.
This carry trade began to unwind in August when the Bank of Japan raised interest rates, triggering Stronger yen and a dramatic sell-off in global markets.
After four consecutive days of strength, the yen fell 0.38% to 141.9 against the dollar.
Some analysts estimate that yen carry trades could total as much as $4 trillion after 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 S&P 500 recording losses worst week The August jobs report was the weakest since March 2023.
“I do believe there could be a period of significant stock market selling this month, especially as the U.S. economy moves in the direction that many central bankers fear,” Lane said.
Japanese Nikkei 225 Index Was result in loss In Asia on Monday, the country’s second-quarter gross domestic product 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.
