A pedestrian walks past a display board showing morning figures at the Tokyo Stock Exchange along a street in Tokyo on August 5, 2024.
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The rapid unloading of “carry trades” extended on Monday, as market participants sought to unwind the popular strategy amid a dramatic global sell-off in risky assets.
Carry trade refers to operations in which an investor borrows in a currency with a low interest rate, such as the Japanese yen, and reinvests the proceeds in higher-yielding assets elsewhere. This trading strategy has been very popular in recent years.
Traditional safe-haven assets, such as the yen and the Swiss franc, rose on Monday, fueling speculation that some investors are seeking to quickly unwind profitable trading positions to cover their losses elsewhere.
“You can’t get rid of the biggest profitable trade the world has ever seen without breaking some people’s heads. That’s the impression the markets are giving us this morning,” said Kit Juckes, chief foreign exchange strategist at Societe Generale, in a research note published on Monday.
A man looks at the window of an exchange office showing the exchange rate of various currencies against the Japanese yen, along a street in central Tokyo on April 29, 2024.
Richard A. Brooks | AFP | Getty Images
A recent batch of weaker-than-expected U.S. economic data, including Friday's labor market report, manufacturing data and a handful of other weak indicators, has sparked a “huge reaction” in a weak August market, Gox said.
“That's the easy part to understand. The harder question is what happens next,” he added.
The biggest reaction in the FX market was “shortening,” Gox said. He said long positions against the Japanese yen, the Australian dollar, the British pound, the Norwegian krone and the US dollar were all being trimmed.
A decline in the Japanese yen below 140 yen to the dollar in the near term “would be unsustainable given the impact on stocks and inflation,” Gox said.
Yen 'carry trade' not dead yet, consulting firm says
The Japanese currency has risen sharply against the US dollar in recent weeks, trading at 142.17 yen per dollar at 1:30 p.m. London time on Monday. That’s in stark contrast to the run-up to the July Fourth holiday in the US, when the yen fell to 161.96 yen per dollar for the first time since December 1986.
Along with weak U.S. economic data, the August stock market rout was exacerbated by disappointing earnings from big tech companies and a hawkish Bank of Japan. The shift in Japanese monetary policy prompted one strategist to warn of a “short-term collapse” in the yen trade.
Separately, Russell Napier, co-founder of investment research portal ERIC, said in a recent installment of his “Solid Ground” macro strategy report that investors are now getting a glimpse of the impact that a change in Japanese monetary policy could have on U.S. financial markets.
Ed Rogers of Rogers Investment Advisors said the yen trade is not over yet, despite the deep sell-off in the stock market.
“There's certainly been a temporary panic about the yen carry trade. I don't think it's over. I don't think it's dead,” Rogers told CNBC on Monday.
“There is still a big interest rate differential to be exploited but… a lot of people are looking to cover existing positions, and the yen carry trade is probably one of those that people are worried about,” he added.
What should investors be wary of?
Credit spreads should be a top priority for investors in the coming weeks, Peter Shafrik, global strategist at RBC Capital Markets, said on Monday.
“I would also say that those positions that people typically go to in the summer and think are going to do well. That includes any kind of carry trade, let’s say (in) credit, or in the sovereign markets… Bond volatility has gone up, how much higher is it going to go?” Shavrik told CNBC’s “Street Signs Europe.”
“I think all these things that people would normally expect to be a quieter period are now not the case. That's the thing to be wary of,” he added.
