The Japanese Yen (JPY) retreated from its six-month highs on Tuesday as the unwinding of carry trades slowed. However, the JPY strengthened against the US Dollar (USD) due to growing expectations that the Bank of Japan (BoJ) may implement further monetary policy tightening.
The Bank of Japan raised its short-term rate target by 15 basis points (bps), adjusting it to a range of 0.15%-0.25%. Furthermore, the central bank announced a plan to cut its monthly purchases of Japanese government bonds (JGBs) to ¥3 trillion, starting in the first quarter of 2026.
The upside potential for the USD/JPY pair may be constrained as the US Dollar encounters headwinds from increasing expectations of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool shows a 74.5% probability of this rate cut at the September meeting, up sharply from the 11.4% chance reported just a week ago.
USD/JPY trades around 145.20 on Tuesday. The daily chart analysis shows that the pair has halted its losing streak that began on July 30. The 14-day Relative Strength Index (RSI) is below 30, indicating that the currency pair is oversold and may experience a short-term rebound.
The USD/JPY pair may test the throwback support at the 140.25 level, a point observed in December.
On the upside, the USD/JPY pair might encounter resistance at the nine-day Exponential Moving Average (EMA) around 149.22. A break above this level could diminish the bearish bias and allow the pair to test the "throwback support turned resistance" at 154.50, followed by the 50-day EMA at 155.58.
The Yen Carry Trade: A Primer
The yen carry trade is a complex financial strategy that involves borrowing money in a low-interest-rate currency, like the Japanese yen, and investing it in a higher-yielding currency or asset. This strategy has been popular among investors for years, as it offers the potential for significant profits. However, it also carries a high degree of risk, as the value of the yen can fluctuate significantly.
The Unwinding of the Carry Trade
The recent turmoil in global financial markets has been attributed, in part, to the unwinding of the yen carry trade. As investors have become increasingly risk-averse, they have been selling their yen-based investments and repaying their yen-denominated loans. This has led to a sharp appreciation in the value of the yen, which has put pressure on other asset classes, including stocks and bonds.
The Impact on Global Markets
The unwinding of the yen carry trade has had a significant impact on global markets. Equity markets have plunged, and yields have fallen across the Treasury curve. This is because investors are seeking safe havens in the wake of the market turmoil. The Fed has also been forced to take steps to ensure that financial markets have sufficient liquidity.
The Future of the Yen Carry Trade
The future of the yen carry trade is uncertain. It is possible that the unwinding of the trade will continue, which could lead to further volatility in global markets. However, it is also possible that the yen will stabilize, which would allow investors to return to the carry trade. Only time will tell what the future holds for this complex and risky investment strategy.
The Bigger Picture: The End of Easy Money
The turmoil in global markets is just the latest manifestation of the end of easy money. For years, investors have been able to borrow money at historically low rates and invest it in risky assets. This has led to a period of unprecedented growth and prosperity. However, this period of easy money is coming to an end. Central banks around the world are raising interest rates, and this is leading to a decline in asset prices. The unwinding of the yen carry trade is just one example of this broader trend.
What’s Next?
The future of the global economy is uncertain. Investors are facing a number of challenges, including rising inflation, rising interest rates, and geopolitical uncertainty. However, it is important to remember that markets are cyclical, and this current period of volatility is likely to be followed by a period of stability. Investors who are able to stay calm and disciplined during times of uncertainty are likely to be rewarded in the long run.
A Look Ahead: What to Watch For
Investors should pay close attention to the following developments in the coming months:
- The Fed’s Monetary Policy: The Fed is expected to continue raising interest rates in the coming months, and investors will be closely watching to see how the Fed’s decisions impact the economy.
- Inflation: Inflation is still a concern for investors, and the Fed’s efforts to control inflation will be a key factor in determining the direction of the economy.
- Geopolitical Uncertainty: Geopolitical uncertainty is a constant threat to global markets, and investors will be watching to see how events unfold in Ukraine, China, and other parts of the world.
Conclusion: Stay Disciplined and Stay Informed
The current market turmoil is a reminder that investing involves risk. However, it is also a reminder that markets are cyclical and that periods of volatility are eventually followed by periods of stability. Investors who are able to stay disciplined and stay informed are likely to be rewarded in the long run.
