Mizuho Bank: Yen carry trade unwinding frenzy is nearing its end, expected to hover in the short term between 140 and 145
The chief Asian foreign exchange strategist at Mizuho Bank stated that the unwinding of the yen carry trade is nearing its end, with the yen expected to fluctuate between 140 and 145 in the short term. Following a series of yen appreciations after the Bank of Japan's interest rate hike, investors have been closing out their yen carry trades, leading to a shift in the yen's appreciation trend. The magnitude of the Federal Reserve's interest rate cuts is being reassessed, prompting investors to adjust their positions and causing global asset volatility. Mizuho Bank has revised its target price for the yen, but believes that the Japanese government is unwilling to see significant fluctuations in the yen. Carry trades refer to investors exchanging low-interest currencies for high-interest currencies and investing in high-yield assets. When market conditions change, investors need to close out their positions, leading to a decline in stock prices and an appreciation of the yen
According to the Wisdom Financial APP, the Japanese yen, after the Bank of Japan's interest rate hike last week, accelerated its appreciation for five consecutive days. During the Asian session on Tuesday (August 6th), the yen fell to 144.95 against the US dollar and 5.383 against the Hong Kong dollar. Zhang Jiantai, Chief Asian Foreign Exchange Strategist at Mizuho Bank, stated in a media interview that four factors - changes in US interest rate prospects, increased risk of a hard landing for the US economy, the Bank of Japan's hawkish turn, and relatively light summer trading - have led investors to gradually close out yen carry trades, triggering a yen rally. However, this wave of unwinding positions is nearing its end, and it is expected that the yen will shift from unidirectional fluctuations to range-bound movements, hovering between 140 and 145 in the short term.
Zhang Jiantai cited data from the US CFTC, indicating that speculative long positions in the USD/JPY pair have dropped sharply from a historical high of 184,000 contracts on July 2nd to 73,000 contracts on July 30th. This reflects that the unwinding of yen positions began before the Bank of Japan's interest rate decision, and the weakening labor market data acted as a catalyst for the unwinding frenzy. Market sentiment quickly turned negative, with a reassessment of the extent of the Fed's rate cuts this year. Investors reallocated their positions, closed out carry trades, and caused significant volatility in global assets.
"There are currently no major financial risks, no wars, and no epidemics. It's just that the cooling of the US labor market is faster than expected, and the Fed still cannot ignore inflation risks, so the possibility of an emergency rate cut is very low," Zhang Jiantai said. The bank adjusted its third-quarter target for the yen after the Bank of Japan's rate hike in July. However, the recent market volatility over the past two days has made the target of 150 by the end of September seem distant. Nevertheless, he believes that the Japanese government is also unwilling to see significant fluctuations in the yen. Therefore, when market sentiment calms down, the yen still has the potential to move towards 150.
It is reported that carry trades refer to investors borrowing low-interest currencies like the yen, exchanging them for high-interest currencies like the US dollar, and investing in high-yield assets such as stocks to earn interest differentials and capital appreciation. When market conditions change, investors need to sell off high-yield assets such as stocks to cash out and repay debts, and then buy back yen to close out carry trades. As a result, stock prices will fall, and the yen will appreciate