The Second Leg Of The Yen Carry Trade Unwind May Have Just Started

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The yen carry trade unwind may accelerate with Shigeru Ishiba's election as Japan's Prime Minister, favoring rate normalization.The yen has strengthened significantly across global currency pairs ...

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Shigeru Ishiba was selected by the ruling party to be the next leader of Japan, and he is reported to favor rate normalization. This led to a swift strengthening in the yen across global currency pairs. TradingView This could be a significant development, especially if inflation continues to be a problem in Japan and the odds of rate hikes increase over the coming weeks. Currently, the policy rate is just 25 bps, and some at the BOJ believe the rate needs to rise to around 1%. While BOJ governor Ueda has recently noted that they can take their time, having the support of the new PM will likely help to make the path to raising easier. A Stronger Yen This means that the yen's strengthening is likely to continue, leading to the further unwinding of the carry trade, which appears to have stalled since the middle of September. The USD-JPY's (USD:JPY) relationship with the NASDAQ 100-Index (NDX) has been strong and has been in place since the start of 2023. TradingView The range-bound nature of the USD-JPY since mid-August has given the Nasdaq a chance to regroup and recover some of the losses it has seen since peaking in mid-July. So, one must be mindful that if the USD-JPY continues to strengthen and heads below the 140 level, it could lead to further disruption in US equity markets, similar to what was witnessed in the first part of August through mid-September. TradingView Other relationships are similar, such as the riskier MXN-JPY currency pair, which has also had strong trading in the NASDAQ over the months. TradingView The CAD-JPY also had strong ties to changes in the NASDAQ over time. TradingView The most evident sign of a carry trade unwind commencing is if these different currency pairs show yen strengthening. If that is the case, such strengthening could negatively impact the Nasdaq. Levels To Watch However, real damage may not commence until the USD-JPY breaks a support level of around 140. That has been an important level for the USD-JPY since the summer of 2023. A break of support could lead to the USD-JPY falling to around 138, which has been a critical level of support and resistance going back to November 2022. TradingView Additionally, if the trend continues, the CAD-JPY will probably have a bit further to fall than the USD-JPY. The CAD-JPY's major support level is around 104.00, which goes back to the spring of 2023. Failure to hold support would push the CAD-JPY lower to around 101. TradingView A drop to 138 on the USD-JPY and 101 on the CAD-JPY would most likely lead to a significant weakening of the Canadian loonie versus the US dollar, pushing the USD-CAD (USD:CAD) higher to around 1.36. Given the USD-CAD's inverse relationship to US equity markets, it would likely signal lower prices in the NASDAQ as well. In fact, a falling USD-JPY and a rising USD-CAD probably give us a real-time sense of whether the carry trade unwind is taking place. Impacts On Equity Markets Over time, we have noticed that when the USD-CAD peaks, it has been associated with local lows in the NASDAQ, and when the USD-CAD bottoms, it has been associated with local highs in the NASDAQ. A move to around 1.36 from its current value of around 1.348 would signal a short-term top in the NASDAQ. TradingView Follow-up In mid-September, it was noted that liquidity would fall sharply in the final two weeks of September and that historically, when reserve balances fall, it tends to be associated with a market selloff. To this point, though, liquidity has fallen as expected, but the equity market has not sold off. Reserve balances have fallen to around $3.15 trillion. They will likely continue declining through Monday, the quarter's final day, which is usually when the reverse repo facility spikes. Additionally, now that the Fed cut interest, the Bank Term Funding Program saw loans fall to $86 billion this past week. The loan program may unwind faster than previously expected, meaning reserves will still decline by at least $85 billion over time as that liquidity is removed. Bloomberg There are two reasons why this sell-off may have not happened. The first is that lag effects haven't filtered through yet. The second is that the JPMorgan Hedged Equity Collar, for expiration on September 30 at the 5,750 strike price hedging flows, has overwhelmed the market. That collar will roll off on Monday, and a new one for December 31 will be implemented. Once that collar is closed out, likely sometime during the day on Monday, the market maker hedging flows that have kept the market range bound will be no more. This allows the market to move more freely, either up or down. Bloomberg  However, given the drop in liquidity levels and the potential unwind of the carry trade that is likely to restart, one should be prudent with this market and consider giving things until Tuesday before making any significant determination.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"Policy And Regulatory,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2470034764"}