The Japanese stock market has rebounded after the collapse of Black Monday. Things seem to be calming down, but the strength of the yen has caused many speculators to leave the market, which is why one Wall Street giant warns that it has not yet finished closing out positions.
The Japanese Nikkei 225 stock index rebounded by more than 10% after the previous collapse of more than 12% in a true Black Monday for the world’s stock markets, while the Japanese currency tries to stabilize in the foreign exchange market at levels of 145.60 yen per dollar. It was the strength of the yen after the intervention of the Japanese government and the rise in rates by the Bank of Japan (BoJ) carried out days ago that caused many market operators to undo “carry trade” positions taken in yen, unleashing panic not only in Japan but in the rest of the world’s markets. The day after Black Monday seemed to show calmer spirits and a certain stability. However, From Wall Street, one of the emblematic banks, JP Morgan, came out to warn that the bleeding may not have stopped yet. since, according to its analysts, there are still many “carry trade” positions to be closed.
JP Morgan notes that the global unwinding of carry trade positions motivated by the strength of the yen in recent days is far from over, which may indicate that the short-term correction in global stock markets is not yet over. “We are far from over. The reduction in the carry trade, at least within the speculative investor community, is somewhere between 50% and 60% complete.“one of the bank’s currency strategy directors, Arindam Sandilya, told Bloomberg TV.
Carry trade in yen: what is it all about?
What is the yen carry trade: to borrow in Japanese currency, taking advantage of low interest rates in Japan to buy other assets with higher returns in other markets. As the Japanese government’s intervention to strengthen its currency has become more assertive in recent weeks, and the BoJ’s rate hike announced at the end of last month, it has caught many traders off guard who were not expecting a sudden spike in volatility in the yen. Sandilya said the technical damage inflicted on portfolios by the short, sharp move cannot be easily repaired, so a recovery from such trading is unlikely in the near term. He said a good scenario is for markets to stabilise around current levels, perhaps a shallow recovery at best. But in many of these cases there is a tendency to see a continuation of the moves, albeit at a slower speed than before.
More explanations for a profitable strategy in 2024
Forex market experts have already been warning that one of the biggest trading operations this year has been, precisely, the “carry trade”, a strategy that, as already explained, consists of traders borrowing in a low-yield currency to buy a higher-yield one and pocketing the “carry” interest rate differential.
But by its very nature, the mechanism is fundamentally a low-volatility trade, as higher volatility increases the potential for an adverse cash market move to wipe out any carry gained, and potentially more. In that regard, the yen had been standing out as one of the most favored funding currencies for these strategies. But in the past two weeks, not only did the Finance Ministry’s intervention succeed in putting an end to speculation, but the BoJ’s bold, more aggressive-than-expected decision caused volatility to rise, while further eroding the carry that could be gained on such positions. Following the abrupt reduction in the carry rate, some traders and money changers find it almost ironic that the Japanese Ministry of Finance does not care about speculation when it moves the market in its favour. For now, some believe that since short yen positions have been significantly unwound, it is likely to limit the scope for further carry divestment.
It should not be forgotten that the “carry trade” had become a strategy that had proven to be profitable in 2024 in the equity segment and in commodities such as gold, which enjoyed a sustained upward trend. So the market, perhaps, could have expected that its dismantling would cause unrest among assets and an increase in volatility. Another factor that should not be overlooked is that such extreme movements that the markets have recently experienced have been exacerbated by the seasonally scarce liquidity observed at this time of year, when holidays are in the northern hemisphere. That is why Some voices came out to warn that what we saw in these hectic days was exaggerated and out of context given the prevailing macroeconomic fundamentals and the context of monetary policy..
Source: Ambito
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