To what extent has the yen carry trade progressed?

Arbitrage trading reversal has always been seen as one of the important drivers of the recent sharp rise in the Japanese yen, becoming a focus of investor attention. However, according to a recent report by Nomura, the Japanese yen arbitrage trading has not been completely unwound.

Nomura analyst Yoshitaka Suda released a report on Wednesday, pointing out that according to data from the Commodity Futures Trading Commission (CFTC), as of last Tuesday, the Japanese yen short positions had decreased by about half since July 30. Data released by the CFTC is an important source for investors to understand market positions, but there is a time lag in the data release.

In addition, it appears that CTAs (Commodity Trading Advisors) have switched to a net short position on the US dollar/Japanese yen, but some macro funds still seem to hold yen arbitrage positions.

Japanese yen arbitrage trading is essentially a currency arbitrage strategy, where investors borrow low-interest Japanese yen and then invest these funds in high-yield assets such as stocks or other currencies to profit from interest rate differentials. This strategy is particularly prevalent in a global low-interest rate environment.

Bank of Japan Deputy Governor Masayoshi Amamiya stated on Wednesday that there will be no rate hikes in times of market instability. The market interpreted this statement as a dovish signal from the Bank of Japan, causing a sharp downward turn in the Japanese yen.

Nomura pointed out that although macro funds have reduced their short positions on the Japanese yen, the depreciation of the yen may increase the risk of the Bank of Japan raising interest rates, which could pose a risk to arbitrage traders.

The institution also mentioned that recent volatility in the US stock market may affect global markets, including yen arbitrage traders, and systematic investors may need to further reduce their net long positions in US stocks