Carry trade unwind has more room to unfold by Investing.com

Goldman Sachs strategists believe that the recent relaunch of the carry trade involving the Japanese yen (JPY) still has work to do, despite the significant moves already seen.

The sell-off in , which began late last week, has drawn considerable attention to how well the yen is trading and how long it may continue. Strategists said the limited data available made prediction difficult, although there were some key indicators to consider.

According to Goldman’s Friday note, while the most recent CFTC data indicates that net short positions among non-commercial investors fell from nearly $15 billion to just $1 billion, that doesn’t capture the full picture.

“This alone would suggest that about 90% of commercial shipping is done,” the strategists said.

“While it is difficult to have high confidence in any estimate, we believe the actual number is likely lower, leaving more wiggle room given the substantial holdings in more ‘sticky’ parts of the investor space and positions taken outside the futures markets .”

Goldman Sachs points out that the sum of foreign equity holdings among Japan’s stock investment trusts, public pensions and other large investors rose to about 300 trillion yen as of Q1 2024, from 135 trillion yen before the aggressive policies began monetary easing of the Bank of Japan. .

Even assuming that only half of these investments are exposed to currency fluctuations, there is still about $1 trillion at risk of significant losses if the yen continues to appreciate, potentially driving more repatriation flows and strengthening both equity selling and the rapid appreciation of the yen.

“That said, any related flows would likely move slower on average than the rapid change already seen in the speculative community,” the strategists continued.

“Furthermore, we are skeptical that the yen has been used so heavily as a long funder elsewhere, particularly in US tech stocks,” they added.

Instead, strategists believe the recent correlation between USD/JPY selling and Nasdaq declines is more likely due to a “perfect storm” of factors supporting the yen, rather than deep leverage from the carry trade.

However, if Japan were to experience a further sharp tightening of financial conditions, it could disrupt the trajectory of domestic inflation and hamper the Bank of Japan’s ongoing rate hike plans, as indicated by Vice Governor Uchida. This is a key reason why Goldman Sachs believes that a rapid and substantial strengthening of the yen is unlikely, unless there is a significant risk of a US recession.