Russell, I, too, have lived through many carry trade unwinds in my 40+ years in the FX markets. the hype about this one has been remarkable. I cannot help but notice that when the Fed started raising rates, USDJPY was around 115 and as the Fed hiked, USDJPY followed right along. if Deutsche Bank's calculations of $20 trillion of carry trade outstanding are anywhere near accurate, there is, in my estimation, zero probability that the carry trade has been unwound. certainly, the last entrants and the weakest hands have probably exited, but if I bought USDJPy at 120 in 2022 and simply rolled it over monthly, I have probably made > 40% in the past two+ years, even after the big drawdown from the peak at 162. If that is me, I am probably not scared and given the BOJ has given more signals that they are not about to hike rates as quickly as they indicated before, it would be viable to hedge my position in the short-run ahead of the CPI tomorrow and re-evaluate after the data prints. I know today's PPI was cool, but that doesn't mean CPI can't be hot.
positions that take years to establish, don't unwind in 2 weeks. plenty of folks are still short plenty of yen. 2008/9 was a carry trade unwind. this was a blip
Adding to your thesis, I think most US mkt participants are jumping the gun on the Fee cutting rates, which will remain higher for longer as the US consumer isn't so rate-sensitive.
Russel, I really appreciate this article. It will be interesting to revisit it in a few months to see if the widely discussed 'end of the carry trade' turns out to be less final than expected. You mention pro-labor policies quite a bit. While I can see a political shift in that direction in the UK, I don't see it as strongly across the rest of Europe or the US. To me, it seems more like a labor shortage where demand is exceeding supply, leading to higher wages. Could you clarify what you mean by pro-labor policies? I more or less associate such policies with high unemployment and civil unrest that follows.
Tariffs and industrial policy focused on domestic investment I see as pro-labour policies. Also increasing government spending is also a pro-labour policy. Anti-globalisation tends to be "pro-labour"
Russell, I, too, have lived through many carry trade unwinds in my 40+ years in the FX markets. the hype about this one has been remarkable. I cannot help but notice that when the Fed started raising rates, USDJPY was around 115 and as the Fed hiked, USDJPY followed right along. if Deutsche Bank's calculations of $20 trillion of carry trade outstanding are anywhere near accurate, there is, in my estimation, zero probability that the carry trade has been unwound. certainly, the last entrants and the weakest hands have probably exited, but if I bought USDJPy at 120 in 2022 and simply rolled it over monthly, I have probably made > 40% in the past two+ years, even after the big drawdown from the peak at 162. If that is me, I am probably not scared and given the BOJ has given more signals that they are not about to hike rates as quickly as they indicated before, it would be viable to hedge my position in the short-run ahead of the CPI tomorrow and re-evaluate after the data prints. I know today's PPI was cool, but that doesn't mean CPI can't be hot.
positions that take years to establish, don't unwind in 2 weeks. plenty of folks are still short plenty of yen. 2008/9 was a carry trade unwind. this was a blip
Adding to your thesis, I think most US mkt participants are jumping the gun on the Fee cutting rates, which will remain higher for longer as the US consumer isn't so rate-sensitive.
agreed
Russel, I really appreciate this article. It will be interesting to revisit it in a few months to see if the widely discussed 'end of the carry trade' turns out to be less final than expected. You mention pro-labor policies quite a bit. While I can see a political shift in that direction in the UK, I don't see it as strongly across the rest of Europe or the US. To me, it seems more like a labor shortage where demand is exceeding supply, leading to higher wages. Could you clarify what you mean by pro-labor policies? I more or less associate such policies with high unemployment and civil unrest that follows.
Tariffs and industrial policy focused on domestic investment I see as pro-labour policies. Also increasing government spending is also a pro-labour policy. Anti-globalisation tends to be "pro-labour"