On April 17, 2024, pedestrians walked past a currency exchange shop in central Tokyo.
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The Fed’s rapid rate cuts could make things worse globally”carry tradeRelax, say economists at TS Lombard.
The warning comes as market participants seek aggressive rollback after arbitrage trade Sharp global sell-off in risky 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.
European stock markets are TBD on Tuesdaygiving back earlier gains in a wavering sense of relief.
one Stock market plunges in August partly by U.S. economic data weaker than expected last weekend. The data prompted investors to worry that the Fed might be behind schedule in cutting interest rates. Recession-proof.
Economists at TS Lombard said in a research note released on Monday that “the Fed’s natural response to weak labor market data and new recession risks is to cut interest rates, and to cut interest rates relatively quickly. But this will exacerbate arbitrage.” The closing of a transaction.
“The U.S. economy should trump everything else, but central bankers are justified in being cautious,” they added.
“Triple Whammy”
Economists at Investment Strategy Research, led by Freya Beamish, said they would like to see coordinated messages from the Bank of Japan and the Federal Reserve to calm market jitters.
“Then, if carry trades are indeed a problem, we would hope that these central banks would take steps to introduce some form of quantitative measures, which would help prevent Japanese and other investors in yen carry trades from having to sell assets and facilitate The Fed will cut interest rates at the appropriate time without exacerbating financial vulnerabilities,” said economists at TS Lombard.
A Fed spokesman declined to comment when contacted by CNBC on Tuesday.
Traditional safe-haven assets such as the Japanese yen and Swiss franc, surge on Mondaycome on guess Investors are looking to quickly sell off profitable carry trades to cover losses elsewhere.
The yen has risen sharply against the dollar in recent weeks, trading at 145.07 yen per dollar at 1:10 pm London time on Tuesday. That was in stark contrast to the eve of the July 4 U.S. holiday, when the yen fell to $161.96 for the first time since December 1986.
Strategist HSBC said it has essentially been a “triple whammy” in recent days, citing the unwinding of carry trades, the monetization of artificial intelligence and the prospect of an imminent U.S. recession.
On July 31, 2024, the Japanese flag was raised at the Bank of Japan (BoJ) headquarters in Tokyo.
Kazuhiro Nogi | AFP | Getty Images
“We believe it is too early to buy, but fundamentals remain broadly supportive,” HSBC strategists said in a research note released on Tuesday.
“We believe the biggest risk now is a self-sale, given negative wealth effects and tighter credit conditions, which will ultimately lead to a recession,” they added.
“Reawakening with vengeance”
Kit Juckes, chief currency strategist at Societe Generale explain In a recent research note, “massive arbitrage unwinding is underway.”
“You can’t unwind the largest carry trade the world has ever seen without breaking some heads. That’s the impression the market gave us this morning,” Jewkes said on Monday.
Juckes pointed out that the biggest reaction in the foreign exchange market is still to “lighten positions.” He said long positions in the Australian dollar, pound, Norwegian krone and U.S. dollar against the yen had all been cancelled.
He added that a yen dip below $140 against the dollar “would be unsustainable” in the short term given the impact on stocks and inflation.
Global assets from the United States to China “look exposed”, economists at TS Lombard said on Monday.
They continued: “The maturity mismatch in the external balance sheet caused by years of excessive easing by the Bank of Japan drove Japanese investors out of foreign assets as the curve flattened in the early stages of the epidemic.”
“But currency divergence since the Fed started raising rates has created a new opportunity – the resurgence of the old carry trade.”
—CNBC’s Michael Bloom contributed to this report.
