Investing.com – The yen’s recent sharp appreciation due to the unwinding of the yen carry trade could be a roadblock to further hikes by the Bank of Japan, say Goldman Sachs analysts, but not the Federal Reserve. cuts.
At 07:00 ET (11:00 GMT), it was trading 0.3% higher at ¥147.64, with the pair gaining more than 2% over the past week and recovering after a sharp decline in July.
The pair is still down more than 6% over the past month.
The yen’s big jump, which coincided with a spike in volatility between assets, has heightened the focus on the yen carry trade and the broader financial market implications of further unwinding.
Limited data availability poses a challenge to confidently assess “how much is left,” but substantial holdings of longer-term investors leave room to run, the bank said in an Aug. 11 note.
That said, subsequent settlements should generally be slower as, based on futures positioning alone, roughly 90% of speculative short positions appear to have already been unwound.
Despite the sharp decline, “we believe that the coincidental timing of disappointing earnings and a ‘perfect storm’ of JPY positive factors – including weaker macro data, supportive interventions for the yen and a surprise rate hike by the BoJ – explain the unusually close correlation between sales explains it best. offs in USD/JPY and the Nasdaq in recent weeks, rather than deep leverage from the carry trade,” Goldman said.
In any case, if Japan sees a renewed sharp tightening of financial conditions, it could complicate the domestic inflation outlook and thus the BoJ’s plan to raise rates further – but not the Fed’s willingness to cut.
Deputy Governor Uchida’s comments last week indicate that the BoJ is prepared to adjust its policy in response to market volatility to avoid a rapid and significant appreciation of the yen, which will slow progress towards its inflation target would endanger.
It appears more likely that any instability in financial markets will be caused by the material risk of a US recession or tensions in the system, rather than by deep leverage in the yen carry trade, the bank said.
Moreover, in such a scenario, the room for rapid Fed cuts – and the fear of carry trades is subsiding is no reason for the Fed to hesitate on cuts – should support financial stability rather than further fuel concerns, despite the consequences of a stronger interest rate cut. yen (although this could be a reason for the BoJ to pause further rate hikes).
