Yen trust falls as dollar-yen hits seven-month low
The yen, tracked by Invesco CurrencyShares Japanese Yen Trust, fell as dollar-yen dropped to 154.35, its lowest since February, after touching 154.05 intraday.
The August jobs report came in three times as strong as economists expected. Treasury yields rose. Traders lifted the odds of a Federal Reserve rate hike this month to roughly 60%. Every one of those things is supposed to push the dollar higher against the yen.
That has been the script for years, and the script has a name: the carry trade. That chain of logic just snapped. The dollar-yen exchange rate just fell to its lowest level since February. 05 intraday.
The yen — tracked by the Invesco CurrencyShares Japanese Yen Trust (NYSE: FXY ) — is now down roughly 6% from the late-July peak near 164, which marked the weakest the yen had been against the dollar since 1986. It did all of that on a day when American stock and bond markets were shut for Labor Day, which is exactly the kind of thin, illiquid session in which a currency move gets amplified rather than absorbed. , including Junya Tanase, estimated that between 16 trillion and 17 trillion yen of bearish yen positions, roughly $103 billion, were still outstanding in the market. Their warning was about what happens if dollar-yen trades through 155.
37. A full unwind of positions that size could, in theory, drag the pair into a 142 to 146 range, JPMorgan said. The same note also cautioned that market expectations around a Government Pension Investment Fund reallocation and the pace of Bank of Japan tightening looked somewhat stretched, and that the bank did not assign a high probability to a sustained move much below its assumed 155 to 165 band. Both halves of that call are now live at the same time.
Why The Carry Trade Is Falling Apart The carry trade works on a simple condition. Borrow in a currency that pays almost nothing, park the money in one that pays a lot, and collect the difference for as long as the gap stays wide and the exchange rate stays quiet. That gap is shrinking, and it is shrinking from the Japanese side. That gap is shrinking, and it is shrinking from the Japanese side.
92% on Monday, up 135 basis points from a year ago and only just off levels last seen in 1996. 784%. A year ago the same comparison was worth roughly 250 basis points. Today it is worth about 186.
The Bank of Japan raised its policy rate to 1% in June, a 31-year high, held in July and meets again on Sept. 17 and 18. 25% is largely priced in. Governor Kazuo Ueda has signalled that policy will be set with upside inflation risks in mind.
Board member Hajime Takata went further last week, saying the central bank should move nimbly and leaving open the possibility of larger or back-to-back increases. The pressure is not only domestic. S. Treasury Secretary Scott Bessent met Ueda on the sidelines of the Group of 20 finance meeting in Asheville, North Carolina, and the Treasury said afterwards that he had called for decisive monetary steps to address the weak yen.
Washington and Tokyo intervened jointly to support the currency on July 31. That is an unusual configuration. The funding leg of the world’s most crowded carry trade now has a central bank tightening into it and a foreign treasury department publicly cheering that on. Read Also: Why Rising Bond Yields May Be Just 'Noise' For Stocks, Jordi Visser Says