US Markets
Tuesday, August 13th, 2024 2:46 pm EDT
Key Points
- The rapid unwinding of yen-funded carry trades may still have further to go, with strategists warning that it’s too early to declare the process complete, as the yen remains undervalued and could continue to affect global markets.
- The Bank of Japan’s recent interest rate hikes have strengthened the yen, leading to a dramatic sell-off in global markets and challenging the previously popular carry trade strategy, which involved borrowing in yen to invest in higher-yielding assets.
- While some believe the worst of the carry trade unwind is over, there is still uncertainty and potential volatility ahead, with analysts advising caution and suggesting that the yen may continue to gain strength into 2025.
The recent rapid unwinding of yen-funded carry trades has raised concerns among market strategists, who caution that the process may still have further to go. Carry trades, where investors borrow in low-interest currencies like the Japanese yen to invest in higher-yielding assets, have been popular due to the historically low interest rates in Japan. However, this strategy has faced significant challenges as the Bank of Japan’s recent interest rate hikes have strengthened the yen, leading to a sell-off in global markets. Despite some economists suggesting that the unwind may be nearing its end, strategists like Richard Kelly from TD Securities argue that it’s too early to declare the all-clear. Kelly warns that the yen remains undervalued, and further adjustments in valuations could continue to impact markets over the next couple of years.
The scale of the yen carry trade is difficult to quantify, with estimates ranging from $1.1 trillion to as much as $4 trillion. This uncertainty adds to the complexity of predicting the full impact of the unwind. Kelly advises caution against re-entering high-yielding emerging market assets, suggesting instead a focus on the yen, which may continue to appreciate as structural changes unfold. The ongoing volatility in markets, driven by factors such as U.S. inflation data and concerns over the Federal Reserve’s interest rate policies, further complicates the outlook.
Market participants like Jesper Koll of Monex Group view the recent correction in carry trades as a healthy shift, urging investors to focus on Japan’s domestic economy and corporate restructuring rather than relying solely on the previously profitable carry trade strategy. Analysts at Barclays and other institutions also express caution, noting that systematic selling pressure may not have fully played out and that volatility is likely to remain high. While some believe that the most significant disruptions from the carry trade unwind have already occurred, the consensus is that the yen is likely to continue its upward trajectory, with further implications for global markets into 2025.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/08/13/carry-trades-why-strategists-believe-a-major-unwind-is-far-from-over.html
