Stocks still vulnerable to further unwind of yen carry trade
Wall Street analysts have debated how much money had been parked in the trade, and how much of it has since been unwound.
The inability to settle on a consensus has been due in part to the opaque nature of flows tied to the trade, as well as disagreement about what exactly constitutes a carry trade.
Some have said the yen carry trade amounted to less than $500 billion at its peak, while others have estimated that more than $1 trillion in assets could be exposed to carry-related risks.
But everyone essentially agreed: there was still more toothpaste left in the tube.
“There has been no significant change in terms of bond flows and equity flows into and out of Japan.”
But others said a substantial amount of Japanese “real money” investors — including pension funds and insurance companies — also had exposure to the trade, mostly by holding unhedged positions in foreign assets.
Japanese investors owned more than $4.1 trillion worth of foreign stocks and bonds as of December at current exchange rates, according to Ministry of Finance data.
Joseph Adinolfi MarketWatch 9 August 2024
The Japanese currency’s rapid appreciation could serve to trigger a global financial emergency.
The theory appears to be that after a brief period of policy-induced upset, global finance has stabilized and we’re out of the woods. Alas, dear friends, we’ve barely wandered into the forest.
To see why, it helps to understand the most important phenomenon of this week. It wasn’t the stock-market dips on Wall Street or in Europe, as unpleasant as they were.
It was, and is, the rapid appreciation of the Japanese yen, a currency that now joins U.S. commercial real estate on that elite list of potential triggers of a global emergency.
Everyone knows this carry trade is large, but no one can say how large.
The rapid unwinding of leveraged-carry trades is only part of a broader realignment of Japanese and global portfolios as the Bank of Japan returns domestic interest rates to something resembling normal and the yen to valuations that match.
Don’t expect the process to be quick, or easy.
Joseph C. Sternberg Wall Street Journal 8 August 2024
Unwinding of carry trades
https://englundmacro.blogspot.com/2024/08/market-crashes-usually-have-same.html
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