Soft Spots as Carry Trade unwinds
The yen carry trade may not be done unwinding. The Bank of Japan assurances that more rate hikes are off the table as long as market gyrations continue has helped restore calm for the moment. But deteriorating economic conditions in the US and the expected response from the Federal Reserve are the primary drivers of the yen buying, less so BOJ moves. This means investors may keep unwinding their short positions on Japan’s currency. What would this mean for other global assets? We ran the numbers to get a rough sense.
Our analysis shows that prices of Bitcoin, the NASDAQ and the S&P 500 Index gained the most during the period (Jan. 2022-June 2024) when yen-selling was at its recent peak. The value of currencies ssuch as Mexico's peso and Columbia's peso also climbed. But correlation doesn't necessarily mean causation.
To test whether the price increases of these assets were tied to the carry trade, we also tracked their valuations as the yen climbed from a low against the dollar on July 10. We found that many of the same assets that rose when the carry trade was in full swing fell as the trade unwound. This gives a sense of potential soft spots in the months ahead.
We also compared recent asset price gains with 2007, the last period during which waves of investors took advantage of Japan’s low interest rates to borrow yen and use it to buy higher-yielding assets in other currencies. We found that investment destinations are different this time. Turkey’s lira and the Thai baht, for example, didn’t climb as they did in 2007, which suggests they’re at much less risk of falling now if the carry trade continues to unwind.
There’s no data showing the precise size of the yen carry trade. Most analysts use yen short positions as the go-to proxy to track how much activity there is relative to the past. Major data sources such as Japan’s balance of payments and the Bank for International Settlements provide hints at the current size, but none perfectly capture the picture
Image from Bloomberg
Our analysis shows that prices of Bitcoin, the NASDAQ and the S&P 500 Index gained the most during the period (Jan. 2022-June 2024) when yen-selling was at its recent peak. The value of currencies ssuch as Mexico's peso and Columbia's peso also climbed. But correlation doesn't necessarily mean causation.
To test whether the price increases of these assets were tied to the carry trade, we also tracked their valuations as the yen climbed from a low against the dollar on July 10. We found that many of the same assets that rose when the carry trade was in full swing fell as the trade unwound. This gives a sense of potential soft spots in the months ahead.
We also compared recent asset price gains with 2007, the last period during which waves of investors took advantage of Japan’s low interest rates to borrow yen and use it to buy higher-yielding assets in other currencies. We found that investment destinations are different this time. Turkey’s lira and the Thai baht, for example, didn’t climb as they did in 2007, which suggests they’re at much less risk of falling now if the carry trade continues to unwind.
There’s no data showing the precise size of the yen carry trade. Most analysts use yen short positions as the go-to proxy to track how much activity there is relative to the past. Major data sources such as Japan’s balance of payments and the Bank for International Settlements provide hints at the current size, but none perfectly capture the picture
Image from Bloomberg
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10baggerbamm : if the US cut rates that hurts the carry trade portion that still needs to cover and now forces Japan to cut even further which would create another sell-off due to margin calls from dollar yen spike