Yen carry unwind risks are back!

00:00:00: A sharp rally in the Japanese yen and narrowing U.S.-Japan rate differential increased chances of a reverse yen carry trade, potentially hitting global equities.

00:00:15: Daily Market Talk is Tuesday, the eighth of September.

00:00:19: I'm Yipega Oskar Deshkoia and today we will talk about the mounting yen carry unwind risk opportunities that could come along with it more.

00:00:27: but before we do as always please keep in mind opinions are my own.

00:00:32: this isn't financial advice.

00:00:39: This show is brought to you by SwissQuote.

00:00:41: So the new week kicked off on a positive note for Asian technology stocks.

00:00:45: despite rising yen that followed U.S.

00:00:48: technology peers advance on Friday, on juicy open AI news.

00:00:52: SGPT-SIX model apparently getting very close into the AGI era By appetite was much, much weaker in the European session for European indices as a further rallying energy prices and especially in the european gas prices that are flying today.

00:01:10: An unexpected contraction into German industrial production data of four July on those mixed area growth numbers weighted on Europe's technology poor and cyclical sector heavy industries.

00:01:23: As European central bank is also preparing to announce it when This does aid to tame the Middle East's spike in energy prices, hoping these latest inflationary pressures don't even depend on them.

00:01:38: As such, the euro-dollar advanced slightly yesterday but the move was mostly driven by a broader retreat in the US dollar as the rate hike from European Central Bank this week is almost entirely baked into Euro's valuation.

00:01:49: The dollar on the other hand softened at early spike and crude faded.

00:01:53: But more importantly, the Japanese yen appreciated by a bit chunked yesterday On expectation that rising Japanese bond yields are now able wide enough to convince big Japanese institutional investors To repatriate their funds back home.

00:02:08: The ten-year JGB yield has retreated below the two point ninety percent mark today but after hitting a three per cent level earlier this month and we are still at more than full percentage points above levels once considered by investors as being potential triggers for big Japanese institutions to bring their money back home.

00:02:28: And we are talking here about potentially tens of billions of US dollars of Japanese institutional money coming back home.

00:02:34: Potentially also pulling direct from under the U.S.

00:02:37: Treasuries.

00:02:37: So, a U. S. bond market's return for Mondays break this morning with slight rebound.

00:02:42: but the worries or potential reverse carry trade in yen have not eased.

00:02:46: on the contrary If the BLJ hikes rates this month and more importantly lays out framework for further policy normalization which may be only way to sustain yen's latest rebound, and if in tandem the Fed remains silent aiming at political pressure that will likely become unbearable for Kevin Walsh into November mid-term elections then the risk of a Yen carry trade online will be louder.

00:03:13: That ultimately means we can see the Japanese yen strengthen further The US Treasury yields rise and global equity indices fall.

00:03:21: So if you look at what happened during the latest Yan carry online, The last major Yan carry trade online was in late July early August.

00:03:32: I remember very well it was on vacation.

00:03:33: to trigger Was a nasty combination of the Bank Of Japan raising its interest rates and signaling further normalization ahead again appreciating sharply in reaction To the BOJ's decision an a week US employment data suddenly increasing expectations off Federal Reserve rate cuts.

00:03:51: So that sour cocktail of all these factors by Dan had compressed the US-Japan rate differential from both sides and forced leverage investors to unwind their yen funded positions.

00:04:06: And the result was dollar yen fell more than thirteen percent between mid-July and mid September, and S&P five hundred had dropped nearly ten per cent compared to its prior peak.

00:04:16: The good news is that that shock by then just dissipated very quickly.

00:04:21: it took the s&p five hundred about two weeks only to recover all these losses and continuous journey up was while the Japanese yen swung in between gains and loses for a while early.

00:04:34: two thousand twenty-five bringing us to today where the Japanese alone can no longer stop bleeding in Japan without their US peers' help and more importantly, without adjusting monetary policy and policy rates for the economic fundamentals of Japan.

00:04:53: Kids know you cannot have an inflation at a two percent or half of that four years!

00:04:58: So what would happen if a renewed episode of your hand carry trade unwinding?

00:05:05: It is the same actually on the bank of Japan front.

00:05:08: We're still waiting for the BOJ to normalize this race.

00:05:11: The Fed side is slightly different though, the Fed should tighten its monetary policy today To tame inflation in the US.

00:05:17: but we are unsure how much off tightening it could do given their political pressure and How all the federal reserve policy can impact U.S.

00:05:26: Seals when the u.s.

00:05:27: Treasury's also interfering with longer term bond yields by increasing the size Of his bond buybacks But infinite if the us long longer term yields stop somehow, and the Bank of Japan moves ahead with interest rate hikes.

00:05:40: The US-Japan rate differential could compress to the extent it triggers a renewed carry online trade.

00:05:46: And the latter could be especially painful for AI and technology complex where high, high valuations and crowded positions could amplify the size of a potential sell-off.

00:05:56: I would say that this letter will open the door to buying opportunities as period of carry on.

00:06:01: wine doesn't last forever but it is sure thing in short run at least couple days or weeks investors feel heat.

00:06:09: That's the equities side.

00:06:15: Aussie yen is one of the classic yen carry trades where investors borrow cheaply in Japanese yen to invest higher yielding Australian assets.

00:06:25: As such, the pair hit a record high this year trading near the one hundred and fifteen marks since May.

00:06:34: This year kind of bumping his head against that level.

00:06:37: That trade is supported by hawkish RBA expectations And persistently dovish Bank Of Japan off course.

00:06:43: But that trade also looks quite vulnerable today as Aussie yen has plenty of room Today to retreat and carry trade.

00:06:51: unwinds tend to happen very Very fast and give way too A very very fast appreciation after Aussie versus very rapid appreciation of the Japanese yen, so caution on that front.

00:07:03: The Aussie yen would probably be one of major casualties if a reverse yen carry trade unfolds and gains traction.

00:07:09: Looking beyond the end carry trade story and looking into the Aussie.

00:07:13: The outlook for the Australian dollar has been improving, actually.

00:07:16: The Aussie dollar, for example, spied past a seventy-two cents level in yesterday's trading And the pair is now approaching its May peak which marks highs levels since two thousand twenty-two Now.

00:07:29: part of explanation may be due to the hawkish reserve bank Of Australia expectations obviously and perhaps the broader debasement trade that weighs on the US dollar broadly.

00:07:39: But another part may be that the commodity market proxy most relevant to the Aussie story is changing.

00:07:45: Aussie has historically been a good proxy for iron ore.

00:07:48: The trade captured the China's property boosted growth story quite well indeed, but today Iron Ore is unfortunately under pressure because China demands less steel.

00:07:58: They actually have very severe property crisis there and supply from Africa Brazil And Australia is expected to further weigh on iron or prices away Because copper traders come to rescue by increasingly using the Aussie as a proxy for copper a demand driven not only by China, but by electrification power grids renewable energy infrastructure and increasingly AI and data center investment as well around the world.

00:08:27: And that trade is very powerful today.

00:08:30: The copper hit a record high in LME yesterday, while I was on expectation that the US would expand tariffs to refine copper imports.

00:08:37: But we also have this clear demand supply gap in the couple market where demand is very strong and supply obviously limited And Australia's government expects its copper export earnings to rise from fourteen point six billion Australian dollars today To eighteen point three billion Australian Dollars In real terms by two thousand thirty Two thousand thirty one.

00:08:58: Now, it's important to note that Australia's copper exports remain well below its iron ore exports that stand around one hundred and seventeen billion dollars today.

00:09:07: That's about eight times more than his copper exports.

00:09:10: but rising interest for copper around the world could be supportive of the Aussie against many majors in the coming months and years.

00:09:18: As such, the broader macroeconomic themes of today could result in an interesting divergence on FX markets.

00:09:24: In the shortest run A&K trade online could weigh heavily onto OZN while RBA & Copper Story could eventually offer the Aussie dollar some relative support at least as long as the carry-on line doesn't morph into a broader risk for moving next week.

00:09:40: Moving forward investors will be watching U.S return from its Monday holiday.

00:09:45: Treasury is starting to buy more US bonds this week.

00:09:48: The U.S.

00:09:48: inflation data, the Japanese rate policy intentions into next weeks monetary policy meeting in Japan and the stress levels regarding the mounting risk of a yen carry trade online across global markets before deciding where markets should be heading next.

00:10:05: So that's all for today.

00:10:07: I'm Ipeko Skardeshkaya.

00:10:08: Thank you so much for joining me And thank you for your beautiful and supportive comments.

00:10:14: This episode of Market Talk has been helpful and it's been insightful to you, so please do not hesitate to leave your comments, reactions or questions below as usual.

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00:10:42: So I will meet you again tomorrow.

00:10:46: And until then, good day

00:11:02: trading!