Live Markets: The yen's "depressing" carry trade

TAG Immobilien AG

12/02/2024 09:52

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    THE YEN'S "DEPRESSING" CARRY TRADE
    The dollar recorded a fourth weekly gain last Friday,
pushing the yen to a 10-week low, as traders dialled back bets
on how quickly the Bank of Japan might raise interest rates and
how soon the Federal Reserve will cut them. 
    However, even a gradual tightening of Japanese monetary
policy may not be enough to support its currency.
    "The Japanese government -- as well as wealthy Japanese,
especially pensioners -- are running a massive $20 trillion
carry trade funded in local bank liabilities and invested in
domestic and foreign assets such as the Nikkei, S&P 500 and U.S.
Treasuries," said George Saravelos global head of forex research
at Deutsche Bank.
    "The more the BoJ keeps domestic real rates depressed, the
more fiscal space is created for the government, and the more
profitable this carry trade continues to be," he added. 
    High demand for U.S. assets by Japanese investors keeps the
yen at low levels.
    As long as inflation forecasts stay anchored around 2%,
there is little incentive for the BoJ to tighten policy
aggressively as it would risk disrupting this profitable carry
trade and reducing the government's fiscal space.
    Investors need a "proper" BoJ hiking cycle or evidence that
the carry trade is unwinding for the yen to turn.
    "Unfortunately for JPY bulls, BoJ deputy governor Uchida's
detailed speech (earlier last week), in our view, clearly points
in the direction of a highly incrementalist exit strategy (from
the ultra-dovish monetary policy)," Saravelos argued.
    
    (Stefano Rebaudo)
    *****
    
    FOR MONDAY'S EARLIER LIVE MARKETS POSTS:
    SEA OF GREEN FOR EUROPEAN MARKETS CLICK HERE   
    EUROPEAN SHARES SET TO CONTINUE MARCH HIGHER CLICK HERE  
    US INFLATION LOOMS LARGE WITH ASIA ON HOLIDAY CLICK HERE
        
  

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