2024-08-06 18:28:39
Investors are running to get rid of one of the popular strategies of recent years: The so-called carry trade with the Japanese yen as a “vehicle”. And the result; A unstoppable bleeding in international marketsfrom which not even the Athens Stock Exchange can escape.
What does an investor do when he chooses the carry trade?
It borrows from a country with low interest rates, through a cheap currency, and reinvests them in the assets of another country with higher interest rates, a stronger currency and consequently higher returns. Investors have resorted to this practice en masse in the last 1.5 years, with a characteristic “lightness” and considering that it involves zero risk.
Where were interest rates lowest?
Over the past 18 months in which the Federal Reserve, the ECB, the Bank of England and other central banks have pursued the most aggressively restrictive monetary policy in four decades in order to bring explosive inflation under control, the Bank of Japan… did nothing.
At a time when American and European interest rates were rising dramatically, Japanese interest rates held stubbornly at 0.1%. This huge divergence put pressure on the Japanese yen, which after a long run of depreciation hit a 37-year low in July.
what is happening now
Such a cheap yen was the ideal vehicle for the popular investment strategy, and as a result it grew the largest carry trade of all time, according to calculations by Societe Generale. Today amid fears of a recession in the US economy and as the Federal Reserve prepares to cut interest rates in September (possibly more aggressively than we initially thought), the yen is on an appreciating trajectory and investors are abandoning the carry trade en masse. By closing their positions on this “bet”, they strengthen the Japanese currency and hurt stocks.
How much more pain will we see?
Probably a lot. US hedge funds had positions in more than 180,000 contracts worth $14 billion betting on a weaker yen as of early July, according to the CFTC. Last week these positions were already limited to close to 6 billion dollars. But the US hedge fund market is a very small piece of the yen-denominated lending pie, as ING points out.
According to the Bank for International Settlements until March the Japanese banks they had lent the amount of 1 trillion to foreigners. dollars! That’s a 21% increase over 2021. The more investors turn their backs on the carry trade, the stronger the yen (as well as other safe-haven currencies like the Swiss franc) will be, and the more stocks will bleed.