A man walks in front of an electronic quotation board showing the Tokyo Stock Exchange stock price (left) and the Tokyo yen/dollar exchange rate (right) on August 6, 2024.
Kazuhiro Nogi | AFP | Getty Images
It’s too early to give the all-clear nowarbitrage trade,” strategists warned investors that there may be further room to unwind positions.
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.
Forex strategy has very popular In recent years, investors in particular have expected the yen to remain cheap and Japanese interest rates to remain low.
However, the yen-financed carry trade Started actively closing positions last weekas the Bank of Japan raises interest rates Stronger yen – and led to dramatic sell-off in global markets.
Richard Kelly, global head of strategy at TD Securities, said he was “very hesitant” to declare an end to the carry trade, although some economists said its reduction may be largely complete.
“I would dispute many of those claims. As far as we know, you don’t have any real data to price your carry trades,” Kelly told CNBC’s “Squawk Box Europe” on Monday.
“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.”
Economists say it’s difficult to accurately assess the size of the yen carry trade, with estimates varying widely. Some analysts, using Japan’s foreign portfolio investment, said yen carry trades could total as much as $4 trillion. Reuters reports.
However, TS Lombard analysts said in a research note last week that investors may need to raise up to $1.1 trillion to repay yen carry trade borrowings.
The “real” Japanese strategy
“If you look at our models right now, similar to some of the sentiment you’re seeing in the market, they’re telling you that you should be buying carry trades. You should be buying stocks in Mexico and Brazil and some countries. These high-yield stocks Assets are starting to short some of the funder currencies,” Kelly said.
“I think that’s probably wrong. I think there are structural changes. The (BoJ) still needs to tighten monetary policy, the yen is still fundamentally undervalued, and the Fed starts to loosen monetary policy — that will change some of these rates The differences go in the wrong direction,” he continued.
“So I wouldn’t buy back some of these high-yield[emerging market]assets. I would probably look to go long the yen, but still be in a long dollar environment. I think that’s the right trade, but it’s structural , rather than recent high-frequency data.
On July 31, 2024, the Japanese flag was raised at the Bank of Japan (BoJ) headquarters in Tokyo.
Kazuhiro Nogi | AFP | Getty Images
Kelly’s comments came as market participants braced for key U.S. inflation data to gain a better understanding of the health of the world’s largest economy.
The U.S. producer price index, which measures wholesale prices, is scheduled to be released on Tuesday, while the consumer price index will be released on Wednesday. The data could prompt the Federal Reserve to cut interest rates starting next month.
Last week’s sharp selloff in risk assets was driven in part by weaker-than-expected U.S. economic data. The data raised concerns among investors that the Fed may be lagging behind in cutting interest rates to stave off a recession.
“I actually think the massive, dramatic correction that was seen last week was actually quite healthy,” Jesper Koll, expert director at Monex Group, told CNBC’s “Squawk Box Asia.” , because it forces investors to focus on the real Japanese strategy.
“The real Japan strategy is more than a quick carry trade, borrowing in Japan at near-zero interest rates and investing in high-yielding assets. The real Japan investment trade is the benefits of corporate restructuring, and the first sustainable growth in real wages is coming. So, Focus on the domestic economy, not the bubble economy that comes with zero interest rates,” Cole said.
What’s next for the Japanese yen?
Analysts at Barclays said systemic selling pressure did not appear to have been exhausted and it was “too early” to conclude that the carry trade was unwinding.
Barclays analysts said in a published research note: “Investors are likely to remain nervous in the coming weeks as liquidity will remain thin and risk allocation will be light. We expect volatility to continue to rise, which will The carry trade continues to hurt emerging markets.
“We do not recommend this move to temporarily weaken emerging market interest rates and selectively look for opportunities given the uncertainty in the U.S. economy,” they added.
Not everyone is worried about the long-term impact of unwinding carry trades. Some economists believe the direct disruption from yen-funded carry trades has mostly ended.
“Our base case remains that the recent poor data is more likely to be a temporary disruption than the beginning of a serious economic slowdown, suggesting that the recent rebound in risk assets and currencies will continue,” said Jonas, deputy chief markets officer. ‧Jonas Goltermann said.
“As for the much-discussed unwinding of the yen carry trade, our sense is that most of the direct disruption on this front is now a thing of the past, but we expect the yen to maintain its recent gains and possibly gain further ground over the coming months until 2025,” Goltermann said.
—CNBC’s Michael Bloom and Dylan Butts contributed to this report.
