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Three quarters of the global carry trade have unwound following a major selloff, according to JPMorgan quantitative strategists, while returns in G10, emerging market and global carry trade baskets fell about 10% since May.
With this, year-to-date returns have been wiped out and profits accumulated since the end of 2022 have significantly lowered. “The spot component of the global carry basket would suggest that 75% of carry trades have been removed,” the strategists said in a note, adding that the “clock is ticking for the G10 carry.”
The carry trade strategy involves borrowing currencies with low interest rates to invest in higher-yielding assets elsewhere. Investors rapidly unwound yen carry trades over the past week as the currency strengthened after the Bank of Japan’s larger-than-expected rate hike. This, along with the fears over the state of the U.S. economy, led to a global market meltdown on Monday.
But Chris Turner, global head of markets at ING, cautioned against any definitive declarations of the yen carry trade being 50% or 75% unwound. “We suspect that the top layer of carry – speculators in yen futures markets – may be close to flat in their positions now. As to the deeper layer of the yen carry, we think it is very hard to tell.”
“I think the carry trade shake out may have further to run given the still significant short yen positioning in the market,” said Shaun Osborne, chief FX strategist, Scotiabank.
