(Bloomberg) -- The yen’s renewed volatility means that carry traders are likely to get little respite over Thanksgiving.
From the South African rand to Canadian dollar, traders who shorted the yen against these currencies to invest in higher-yielding assets are nursing losses of over 2% in the past five sessions alone. The numbers look more dire over a one-month period, with positions on the Brazilian real and Swedish krona down about 4% and 3.4% respectively.
Risks of even wilder yen swings are rising as liquidity thins into the Thanksgiving holiday in the US — testing the nerves of investors looking to recoup losses or double-down on their positions.
“This is the type of trade that keeps you up at night,” said Kyle Rodda, a senior market analyst at Capital.Com. “It’ll be a stressful few days to the weekend — there’s little break to be had with the volatility we’re seeing if you’re carrying this carry trade risk.”
The yen has strengthened more than 2% against the greenback this week, bolstered by a sudden jump in expectations that the Bank of Japan will raise interest rates again next month.
The wide interest-rate gap between Japan and other economies has been the cornerstone of the lucrative but potentially explosive yen-funded carry trade.
The Japanese currency fell 0.3% against the dollar in Asia trading Thursday to 151.61 after a 1.3% rally the previous day.
What Bloomberg Strategists Say...
The acceleration of yen strength this week is clear in the way a chunky 153 option strike was dispatched with barely a flicker of defensive dollar buying. From here there isn’t much left on the downside until a large cluster of strikes at the 143.5 level in a week’s time.
Mark Cranfield, MLive strategist
Risks of fresh social media posts by President-elect Donald Trump that could amplify market swings is also bludgeoning the appeal of yen carry trades that typically thrive in low-volatility conditions. Mexico’s peso advanced more than 1% against the yen on Thursday after Trump posted that he had a very productive conversation with president Claudia Sheinbaum.
“Carry traders don’t like uncertainty,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “So another reason to bail would be the increasing prospect of tariffs and policy announcement by Truth Social,” he said, referring to the platform founded by the President-elect.
Another key factor is a big change in rate expectations in Japan. Investors are now pricing in a 60% chance of a rate hike in December compared with 32% at the start of this month, overnight indexed swaps show.
“Since the market has been encouraged that a rate hike could be in play in December, the BOJ may be reluctant to disappoint,” Jane Foley, head of foreign-exchange strategy at Rabobank in London, wrote in a research note.
--With assistance from Masaki Kondo.
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