05/08/2024, 17:27 JPY MXN: Global Carry Trade Unwind Extends as Peso Sinks, Yen Surges - Bloomberg
Markets
Carry Trade Rout Extends as Peso, Aussie Sink, Yen and
Yuan Jump
Funding currencies the yen and yuan surge on short-covering
Mexican peso retreats as pressure returns on EM currencies
By Matthew Burgess
August 5, 2024 at 5:46 AM GMT+5:30
Updated on August 5, 2024 at 12:32 PM GMT+5:30
An unwinding of global carry trades is turning into a rout that’s helping jolt markets
around the world.
The yen and yuan pushed higher Monday, while the Mexican peso’s slump extended as
traders continued to roll back the popular trading strategy. The peso fell more than 5%
against the dollar, while the Australian dollar slumped about 2%. Two currencies often
used to fund carry trades jumped — the yen by more than 3% and China’s yuan by
about 0.7%.
The moves came as a selloff in risk assets intensified with everything from stocks to
cryptocurrencies pummeled as concerns grew that the Federal Reserve is behind the
curve with policy support for a slowing US economy. Investors sought the safety of
bonds.
The sudden appreciation in funding currencies has damaged the carry strategy, which
typically involves traders borrowing at lower rates to invest in higher-yielding assets
often in the emerging world but also in developed markets like Australia.
Worries about US recession risk is a bad environment for carry traders, according to
Alvin Tan, head of Asian currency strategy at Royal Bank of Canada in Singapore.
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05/08/2024, 17:27 JPY MXN: Global Carry Trade Unwind Extends as Peso Sinks, Yen Surges - Bloomberg
“Recession risk also means greater market volatility, hence carry trades being cut,” Tan
said. “I think it could easily extend because we have been in a extended low vol
environment for so long, over a year in fact.”
For Tan, thin markets in the northern hemisphere summer may also be playing a role.
“August volatility spikes can be very dangerous because liquidity tends to be low in the
month,” he added. “August is a popular vacation time in North America and Europe,
so even if things start to stabilize, I’m not sure investors are going to be keen to put on
trades quickly.”
What’s a Carry Trade? When Does It Not Make Money?: QuickTake
Yen-funded carry trades were among the most popular in emerging markets as
volatility remained low and investors bet Japanese interest rates would remain at rock
bottom. But the Bank of Japan raised rates for a second time at its latest meeting and
signaled the potential for more.
Meanwhile, traders eyed the Chinese yuan as a funder given bets the currency would
weaken amid concerns over the nation’s economy.
Year-to-date returns in a basket of emerging market currencies funded by the yuan
turned negative on Monday, while the gain in yen-funded trades came closer to being
erased, according to data compiled by Bloomberg.
“It will take quite some time for momentum to recover for those who have lost money
on the peso-yen,” said Yoshio Iguchi, head of the market department at Traders
Securities Co. “Once the dollar and yen settle down, some people may start to carry
the yen, but it may take some time for investor sentiment to recover.”
Yen, Yuan Funded Carry Trades Have Capitulated
Yen-funded returns have given up most of the year's gain; yuan turns negative
Yen funded basket Yuan funded basket US dollar funded basket
20 %
10
-10
Dec Feb Mar Apr May Jun Jul Aug
2023 2024
Source: Bloomberg
Note: Figures represent the cumulative total return of eight EM currencies -- BRL, MXN, INR, IDR, ZAR, TRY, HUF, PLN --
that is funded in short position in JPY, CNH or USD
There’s been a massive capitulation of carry trade positions “with everyone running
for the door at the same time,” said Nick Twidale, chief markets analyst at ATFX Global
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05/08/2024, 17:27 JPY MXN: Global Carry Trade Unwind Extends as Peso Sinks, Yen Surges - Bloomberg
Markets. “These moves were initially triggered by the hike from the BOJ, but global
growth concerns have added further fuel to the fire in the last couple of days and
moves have become intense.”
— With assistance from Marcus Wong and Daisuke Sakai
(Updates with additional comment)
©2024 Bloomberg L.P. All Rights Reserved.
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