Yen reaches seven-month high as investors reassess carry trades
Business & MarketsWell-covered
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The Facts
- The yen reached 152.89 per dollar, its strongest level since February.
- The yen gained about 4% against the dollar during September.
- Expectations of faster Bank of Japan policy tightening supported the yen.
- A yen carry trade borrows yen to invest in higher-yielding assets or currencies.
- A stronger yen can make carry trades less profitable and prompt investors to unwind positions.
- Carry-trade unwinding could lead to selling in stocks and bonds.
- Markets were awaiting Bank of Japan and Federal Reserve meetings the following week.
Context
What is a yen carry trade?
It is a strategy in which investors borrow yen at low interest rates and use the funds to buy higher-yielding currencies or assets. CNA Investing.com
Why can a stronger yen affect markets outside Japan?
When the yen rises, investors who borrowed it may face higher repayment costs and may sell other holdings to close those positions. Aol Business Insider
What could determine the yen’s next move?
Investors are watching the Bank of Japan’s policy decision and expectations for its interest-rate path, alongside the Federal Reserve meeting. CNA Investing.com
Where Left and Right agree, and where they split
- Where Left and Right agree
- A yen strong enough to squeeze carry trades risks spilling beyond currency desks into broader stock and bond selling.
- Where Left and Right split
- Systemic spillover that policy should actively monitor, or traders bearing the consequences of risk they chose.
- Why they won’t converge
- The disagreement is about who bears responsibility for financial risk, not about the mechanics of the yen's rise, so it persists regardless of further data on carry-trade unwinding.
- Watch for
- The Bank of Japan's September 17-18 meeting, where a 25-basis-point rate hike to 1.25% is now almost fully priced in, will show whether tightening proceeds as markets expect.mql5.com
How left and right read it
The real question here is who absorbs the fallout when bets built on cheap borrowed yen come undone. A currency move strong enough to unwind carry trades can spill into stock and bond selling, so this isn't a contained trading-desk problem but a systemic one. That's why policy attention belongs on watching for that broader unwinding, not just on where the yen settles.
Investors who borrowed cheap yen to chase higher yields took on that risk themselves, not one central banks owe them shelter from. The yen's climb to its strongest level since February, up about 4% in September on faster Bank of Japan tightening expectations, is squeezing those trades, and any unwinding risks spilling into stocks and bonds, so policy should track its own mandate rather than cushion bets traders chose.
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