What’s going on here?
The Japanese yen jumped from decades-long lows after a $40 billion intervention by Japanese authorities, shaking up global FX carry trades.
What does this mean?
A mix of political, policy, and technical factors has significantly boosted the yen, rising from 162 per dollar in mid-July to around 153 per dollar. This two-week surge is its biggest gain of the year. Though it’s still 2024’s worst-performing G10 currency, the yen’s rally is making waves in the market. The expected narrowing of the interest rate gap between the US and Japan, plus possible political shifts in the US, are cooling off bearish bets against the yen. Jamie Gimber from JPMorgan notes that yen net short positions have dropped 40% since April, while Athanasios Vamvakidis from Bank of America points out that this unwinding could impact other carry trades.
Why should I care?
For markets: Shaken, not stirred.
The yen’s resurgence is injecting volatility into previously low-risk carry trades. Traders had borrowed yen cheaply to invest in higher-yield assets like Mexican bonds or US tech stocks. But with the yen’s rise and increased market volatility, these trades are riskier. Nathan Swami from Citi highlights that yen-based carry trades are now more vulnerable to sudden value-at-risk shocks, reducing their appeal to investors.
The bigger picture: Global currents shifting.
The yen isn’t the only currency changing the game. The Swiss franc and China’s offshore yuan also appreciated significantly, altering the carry trade landscape. The franc hit its strongest level since March, and the yuan saw its biggest weekly gain against the dollar since April. With heightened volatility and upcoming political events like the US presidential election, Andreas Koenig from Amundi suggests investors might pause carry trades for now, but he sees potential opportunities post-election, especially in Mexican currency positions.
