Morgan Stanley analysts suggest that the carry trade, a strategy involving borrowing in low-interest currencies like the yen to invest in higher-yielding assets, remains resilient despite the recent appreciation of the Japanese currency. They posit that the yen's roughly 4.5% surge in a week, pushing it to a near seven-month high against the dollar, is primarily driven by an unwinding of short positions, rather than a fundamental shift in the currency's outlook or a sustained hawkish stance from the Bank of Japan (BOJ).
The yen's rally has been notable, breaking through the 155 per dollar level and putting the 152 area in traders' sights. This sharp appreciation has led to significant unwinding of carry trade positions, as investors close out their yen shorts to avoid further losses. The market is also bracing for a potential interest rate hike from the BOJ next week, which has fueled speculation about a more sustained yen appreciation and further pressure on the carry trade.
However, Morgan Stanley's perspective is that the current strength in the yen might be temporary. While the BOJ's potential monetary tightening and hints of capital repatriation are contributing factors, the analysts believe that a sustained yen rally would require more definitive and hawkish follow-through from the central bank. They imply that without stronger fundamental drivers, the carry trade could reassert itself once the current wave of short-covering subsides. This contrasts with other market observations that highlight the vulnerability of the carry trade to a more aggressive BOJ policy and the potential for Japanese institutional money to repatriate tens of billions of dollars, leaving assets like US Treasuries.
