One of the more popular trades in recent memory was the yen carry trade (JPY=X), which backfired after the Bank of Japan started a rate hiking cycle. While it resulted in a sell-off on Monday, will traders continue this strategy?
TD Securities global head of FX and EM strategy Mark McCormick joins Catalysts to give insight into the carry trade and movements in global markets
Right out of the gate, McCormick affirms: "I do not think the carry trade unwind is over. I think we have a long way to go. I think you need to think about whether it’s kind of tactical and the structural nature of it The structural nature of the carry trade is tha,t for pretty much around the last decade, Japanese investors have put their money, mostly pension funds, which accounts for about 80% of GDP in other markets. So the assets that they’re tracking in other markets are actually a big form of the carry trade."
When asked whether the Chinese yuan could be the next carry trade to unwind, McCormick responds: "I think you need to kind of disentangle the correlation of the yuan versus the yen. They have re-correlated right now. They’re being driven by similar factors. So the Chinese yuan is a good funding for a carry trade. And again, if you think about what drives a carry trade in markets, why people love it. It’s very simple. It’s what you need is rate divergence, so one country needs higher rates, another country needs lower rates. And you need low volatility."
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