Carry trade unwind only halfway complete, JPMorgan says

August 06, 2024 (MLN): The recent unwinding in carry trade has more room to run as the yen remains one of the most undervalued currencies, according to JPMorgan Chase & Co as reported by Bloomberg.

“We are not done by any stretch,” Arindam Sandilya, co-head of global FX strategy, said on Bloomberg TV. “The carry trade unwind, at least within the speculative investing community, is somewhere between 50%-60% complete.”

The trade has been pummeled this past week as yen volatility jumped amid fears of a looming US recession and the Bank of Japan’s rate hike.

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Yen carry trades — borrowing at low rates in Japan to fund purchases of higher-yielding assets elsewhere — were among the most popular as volatility remained low and investors bet Japanese interest rates would remain at rock bottom.

A recovery in carry trades to levels prior to the yen’s rally is unlikely anytime soon as the technical damage inflicted on portfolios from the short, sharp move “is not easily undone,” Sandilya said.

“A good case outcome is stabilization in markets around current levels, maybe a shallow recovery at best,” he said. “But in many of these instances you tend to get continuation of the moves, if at a lower velocity than what you had before.”

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