Profit Explains: What Is Yen Carry Trade And Why Is It In Focus

The unwinding of carry trade in the Japanese yen in the wake of its appreciation against the US dollar disrupted global markets. The Japanese yen rose as much as 2.94% intraday to 142.22 against the US dollar on Monday, hitting the highest level since Jan. 4. It was trading 2.12% lower at 143.42 a dollar as of 10:44 a.m.

The Bank of Japan, in line with market expectations, hiked its benchmark interest rate to 0.25% from its 0.0–0.1% last week. This was the second time the central bank hiked its interest rate after ending its ultra-loose policy for the first time in 17 years in March.

The Japanese currency started to gain against the greenback since the market participants anticipated that the BoJ would shift from its ultra-loose policy in early July.

Now, the markets expect the BoJ to go for further hikes, which is strengthening the Japanese currency against the greenback, resulting in sell-off in the yen-funded carry trade.

What's Carry Trade?

Carry trade is a popular concept in the currency market, where investors borrow low-yielding currencies to invest in high-yielding currencies.

Due to the BoJ's ultra-loose policy and the weak yen, investors used the Japanese unit for carry trade widely. In a situation where the yen appreciates against the dollar, the carry trade would yield a loss. Hence, the favourite carry-trade currency's rising might prompt traders to rush to unwind their long positions in the yen, sparking a wide sell-off.

Local equities in Japan have slumped, with the benchmark Nikkei 225 falling 12.41% since last Wednesday when the BoJ delivered the hike, according to data on Bloomberg.

The dollar index slipped below the psychologically crucial 103 level in Asian trade to a day's low of 102.65, the lowest since March 11, in early Asian trade Monday as recession fears in the US rose following weaker-than-expected US Jobs data.

The dollar index was trading 0.43% lower at 102.76 as of 11:29 a.m. This has added to the Japanese yen's strength against the greenback.

Market participants are now anticipating that the US Federal Reserve may go for a more aggressive approach to loosen the monetary conditions at a time when Japan is expected to hike rates further.

The weak US economic data and a possibility of a tighter monetary policy in the east has impacted the US stocks negatively, as more investors rushed to fund their yen-debt. The S&P 500 and Nasdaq Composite settled 1.84% and 2.43% lower respectively.

The yield on the 10-year US Treasury note slipped below 4.0% level on Friday for the first time since Feb. 1, according to data available on US Department of Treasury's official website.

On Monday, the yield on the 10-year US Treasury note extended its fall to 3.72%, the lowest level since June 29, 2023. It was trading 3.73% as of 11:27 a.m.

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