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USDJPY Carry Trade Pressure

USD/JPY

This summer, quiet markets favored the carry trade. Popular funding currencies here are still the JPY and the CNY.

The carry trade involves borrowing low-interest currency and investing in high-interest currency to profit from interest rate differential and exchange rate movements. Traders often use JPY and CNY as funding currencies due to their low-interest rates and stable exchange rates, with USD being a popular target currency due to its higher interest rates and a strong economy.

A higher USD/JPY means that the USD appreciates against the JPY, which is good for the carry trade. A lower USD/JPY means that the JPY is appreciating against the USD, which is bad for the carry trade.

Short-covering rallies in the JPY may happen during risk-off periods, such as the bond sell-off in early August. However, the carry trade can only be disrupted by a consistent increase in volatility.

July's adjustment to the Bank of Japan's Yield Curve Control, which involved raising the cap on 10-year JGB yields to 1.00% from 0.5%, did not result in a stronger yen. No additional changes by the Bank of Japan are expected until late October.

It seems that the BoJ may have to intervene once more if the USD/JPY goes above 145/146 in order to limit its topside.

If we see a weaker dollar in 4Q, as well as some additional BoJ adjustments we may see it push back down to 130.

I did not enter the trade yet, for now it remains an idea *

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