Carry Trade - The Usual Suspect

Is the stock-market meltdown due to the unwind of this popular hedge-fund trade?

Some are speculating about a closer link between the unwinding of the carry trade and sinking stocks. 

Others say the reality is likely more complicated.

Some concluded that the increasingly tightknit relationship between the rising yen and falling U.S. stocks likely wasn’t a coincidence. 

They argued that traders might have been directly fueling leveraged bets on U.S. stocks — particularly megacap names and technology stocks — with money borrowed in yen. 

Now these traders were being forced to cover their short-yen positions by selling their holdings in U.S. stocks.

Carry trades have been used by sophisticated traders like hedge funds for decades. The strategy involves borrowing in a low-yielding currency like, in this case, the yen, then swapping the money for another currency and investing it in assets with a higher yield.

They tend to be most profitable when there is a large spread between the interest-rates on funding currencies and those for which they are being exchanged

Joseph Adinolfi MarketWatch 5 August 2024

https://www.marketwatch.com/story/is-the-stock-market-meltdown-due-to-the-unwind-of-this-popular-hedge-fund-trade-2f6ab020

En av drivkrafterna bakom de hårresande rörelserna kallas på finansspråk för ”carry trade”.

 Kort och gott går det ut på att låna pengar i en valuta med låg ränta för att sedan placera dem i en valuta med högre ränta.

Det har varit en lukrativ strategi för japanska investerare under i stort sett hela det senaste decenniet, då Bank of Japan fört en ultralätt penningpolitik. Inte förrän i början av året övergav landet minusräntan.

Di varnade då för att en stramare penningpolitik skulle kunna leda till ett massivt skifte på finansmarknaderna

Felicia Åkerman DI 6 augusti 2024, 14:16

Kommentar: Lukrativa strategin sänkte Tokyobörsen (di.se)

How big is the carry trade?

It is impossible to say because currency transactions aren’t tracked centrally like trades in the stock market. But there are some ways to assess its popularity. 

One is to look at contracts tracked by the Commodity Futures Trading Commission. That data shows hedge funds and other speculative investors were holding more than 180,000 contracts betting on a weaker yen on a net basis, worth more than $14 billion, at the start of July, according to CFTC data. 

By last week, those positions had been cut to around $6 billion.

Is it over yet?

Probably not. 

Wall Street Journal 6 August 2024

https://www.wsj.com/finance/currencies/what-is-the-yen-carry-trade-e5ab9670

Carry trades are great, until they’re not. 

https://englundmacro.blogspot.com/2024/08/the-sahm-rule-carry-trades-and.html