According to market strategists, the unwinding of ‘carry trades’ may still have more to run. Carry trades involve borrowing in currencies with low interest rates, such as the Japanese yen, and investing in higher-yielding assets. This strategy gained popularity as investors expected the yen to stay weak and Japanese interest rates to remain low, as per a report by CNBC.
The past week saw a major unwind of these trades, triggered by interest rate hikes from the Bank of Japan, which strengthened the yen and led to a global market sell-off. Experts caution against declaring the end of the carry trade unwinds. They highlight that the full impact is not yet fully understood, especially given the yen’s undervaluation.
Richard Kelly, head of global strategy at TD Securities, said he’d be ‘very hesitant’ to declare the end of the carry trade unwind, despite suggestions from some economists that the rollback may be largely complete.
Estimates of the size of the yen carry trade vary. Some analysts suggest it could be as large as $4 trillion, while others estimate that up to $1.1 trillion might need to be repaid. Despite some market signals suggesting it might be a good time to re-enter carry trades, expert’s advice caution. They believe structural changes in monetary policy and currency valuations could make high-yield assets less appealing in the near term.
Investors are also awaiting key U.S. inflation data releases this week, which could influence the Federal Reserve’s decisions. Recent weaker U.S. economic data has raised concerns about a potential recession and the Fed’s response.
Barclay’s analysts warn that selling pressure from carry trades might persist, keeping volatility high and affecting emerging market carry trades. On the other hand, some economists believe that the immediate disruption from yen carry trades might be over and expect the yen to strengthen further in the coming months.
