Carry Unwind Paused, Not Finished

Rapid yen appreciation takes a breather, settling at 144/dollar as markets take stock of the Fed's rate cut outlook.

August 06, 2024 • Est. Reading Time: 2 minutes

Mobius Intel Brief:

As warned before last Wednesday’s Bank of Japan policy meeting, economic uncertainty and narrowing yield differentials are potent risks for the world’s most popular carry trade. Friday’s above-expectations U.S. unemployment data proved to be the catalyst for yen-funded carry unwind and rapid yen appreciation, with the follow-on effects apparent in global market performance between Friday and Monday.

Today’s stabilizing yen and rebounding equities indicate investors’ immediate recession fears have eased. However, the magnitude of carry trades outstanding suggests unwind risks have more room to expand.

Intel Brief Outline:

  • Yen-funded carry unwind, week-on-week FX impact

  • Leveraged fund managers’ yen positioning

  • The volume of international yen borrowing since 2021

  • BOJ incentives for yen appreciation

  • Changes to U.S.-Japan and U.S.-Switzerland yield spreads

  • Near-term risks to watch, including the primary drivers of more yen appreciation

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