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Yen rally threatens to unwind the carry trade ahead of BOJ
The yen strengthened to 152.9 per dollar, while yen cross-border borrowing tied to the carry trade hit a record 360 trillion yen as of March.
A sharp rebound in the Japanese yen has disrupted the long-standing carry trade, as investors reposition ahead of an expected interest rate hike by the Bank of Japan next week, Reuters reported. The surge comes as early hints of capital repatriation and expectations for a quicker pace of monetary tightening by the BOJ, along with pressure from the United States, are lifting the currency.
The yen rally follows levels that had put the currency at 40-year lows in July, when a joint U.S.-Japan intervention was triggered, according to Reuters. The move is also prompting traders to unwind carry trade positions, which typically involve borrowing yen at low rates to invest elsewhere for higher yields.
Reuters cited analysts saying the carry trade could be particularly vulnerable because the unwind is occurring before the BOJ has delivered its expected hike. One Jefferies analysis, using Bank for International Settlements data, found cross-border yen borrowing rose to a record 360 trillion yen, or about $2.35 trillion, as of March.
On Tuesday, the yen firmed to its strongest level since February at 152.89 per dollar, Reuters reported, marking a rapid reversal in fortunes for the currency.