The Resurgence of the Yen Carry Trade: Is Another Black Monday on the Horizon?

The Resurgence of the Yen Carry Trade: Is Another Black Monday on the Horizon?

The Japanese yen has recently weakened to 149 per US dollar, marking a two-week low as the US dollar gained strength following unexpectedly positive US economic data. This shift has reignited interest in the yen carry trade, a strategy that some experts believe could foreshadow another Black Monday-style market crash.

Nomura Holdings, Japan’s largest brokerage firm, revealed that investors are once again borrowing yen to invest in higher-yielding assets. According to a report from Bloomberg on August 16, this trend is particularly evident among corporate clients and hedge funds.

“There has been a notable move back into carry trades after US retail sales data exceeded expectations,” said Antony Foster, head of Group-of-10 spot trading at Nomura in London. Foster also noted that many investors are selling yen to buy currencies like the Australian dollar and the British pound.

US bond yields have risen in response to the retail sales data, which has alleviated some economic concerns and fueled expectations of a potential Federal Reserve rate cut. This environment has made carry trades more attractive, as investors seek quick profits by betting billions of dollars on a weakening yen—a currency that had unexpectedly surged last month.

ATFX Global Markets, an Australian online forex broker, reported a significant 30% to 40% increase in short positions against the yen over the past week, primarily driven by hedge funds and high-net-worth individuals.

Despite these developments, Bank of Japan (BOJ) Deputy Governor Shinichi Uchida has indicated that the central bank does not plan to raise interest rates in the near future due to unstable financial markets. However, the market remains uncertain about the BOJ’s plans for next year, with more clarity expected when BOJ Governor Kazuo Ueda addresses parliament on August 23.

Should Ueda maintain a dovish stance while Federal Reserve Chair Jerome Powell adopts a hawkish tone, the interest rate differential between the US and Japan could remain elevated. This would likely attract even more investors to the carry trade, but it also raises the risk of a market crash reminiscent of Black Monday.

“Global central banks are now leaning towards easing, with the BOJ being the exception, as it continues to keep rates low relative to other central banks. This environment is ideal for the resurgence of carry trades, provided that equity markets and the Chinese currency remain stable,” said Mary Nicola, Markets Live Strategist.

Arthur Hayes Weighs in on Potential Crypto Market Impact

Arthur Hayes, co-founder of BitMEX, has issued a warning that if the BOJ and Fed continue to maintain a significant dollar-yen interest rate differential, the market’s focus on high-leverage trades could make it vulnerable to another Black Monday-like crash. Hayes suggests that Bitcoin’s price could rise if either the currency system collapses or if fiat liquidity chases after assets with finite supplies.

However, as long as the USD-Yen interest rate differential persists, hedge funds are likely to continue exploiting the benefits of the carry trade. The crypto market, which also heavily relies on leverage, remains susceptible to the volatility that such trades can introduce.

Currently, Bitcoin is experiencing a short-term bearish trend, having dropped 5% over the past week to trade at $58,324. The 24-hour trading range has fluctuated between $56,161 and $59,838, with trading volume increasing by 10% in the last 24 hours—indicating growing interest among traders. Bitcoin’s price faces the risk of further decline, potentially falling to $54,000.