The retraction of the carry trade on the Japanese yen is impressive. The yen shot up

Let's start from the beginning. carry trade (not to be confused with curry spice 😉 ) is an investment strategy that involves borrowing money in a currency with a low interest rate and then investing this money in a currency with a higher interest rate. The profit comes from the difference between the interest rates for loans and deposits in the two currencies.

Japan and its dominance in carry trade

This strategy is popular on currency pairs with the Japanese Yen because Bank of Japan maintains very low interest rates, often close to zero. Therefore, the yen is often used as a loan currency in carry trade strategies.

For example, an investor can borrow low-interest yen and then exchange it for a currency with a higher interest rate, such as the US dollar. The investor can then invest those dollars in secure government bonds with a higher interest rate. The profit comes from the difference between the low interest rate on the yen and the higher interest rate on the dollar.

However, carry trade involves some risk. If the loan currency (in this case, the yen) appreciates against the investment currency, the investor may suffer losses. In addition, if interest rates in the country of the borrowing currency increase, the cost of borrowing may outweigh the return on investment. Therefore, it is important for carry traders to closely monitor market conditions and the monetary policy of the relevant central banks.

The dollar exchange rate with a strong fall against the yen

We can talk about the possible closing of carry trade positions on the USD/JPY pair, where in recent days the exchange rate has fallen from 144 yen to 140 yen. Earlier, however, since March, the quotations had increased from around 130 yen to 145 yen.

USD/JPY currency pair chart. CMC Markets platform Next Generation.

Summing up recent events, the Japanese yen strengthened above 140 to the dollar, reaching its strongest levels in more than three weeks amid general dollar weakness as representatives Federal Reserve The US signaled that the end of the current monetary policy tightening cycle is getting closer, even though it has indicated that it is likely to raise interest rates further in order to bring down inflation.

The threat of currency intervention also loomed over the market, with top foreign exchange diplomat Masato Kanda saying last week that Japanese officials had been in close contact with the U.S. Treasury Secretary Janet Yellen and other foreign counterparts almost daily to discuss currencies and the broader financial markets. Finance Minister Shunichi Suzuki confirmed the reports without divulging the details of the talks and warned against an excessive sell-off of the yen.

These words may have prompted speculators to withdraw their positions on the weakening of the Japanese currency, creating one of the strongest trends in recent times.