USDJPY Carry Trade Pressure

Aug 24, 2023

This summer, quiet markets favored the carry trade. Popular funding currencies here are still the JPY and the CNY.

The carry trade involves borrowing low-interest currency and investing in high-interest currency to profit from interest rate differential and exchange rate movements. Traders often use JPY and CNY as funding currencies due to their low-interest rates and stable exchange rates, with USD being a popular target currency due to its higher interest rates and a strong economy.

A higher USD/JPY means that the USD appreciates against the JPY, which is good for the carry trade. A lower USD/JPY means that the JPY is appreciating against the USD, which is bad for the carry trade.

Short-covering rallies in the JPY may happen during risk-off periods, such as the bond sell-off in early August. However, the carry trade can only be disrupted by a consistent increase in volatility.
July's adjustment to the Bank of Japan's Yield Curve Control, which involved raising the cap on 10-year JGB yields to 1.00% from 0.5%, did not result in a stronger yen. No additional changes by the Bank of Japan are expected until late October.

It seems that the BoJ may have to intervene once more if the USD/JPY goes above 145/146 in order to limit its topside.

If we see a weaker dollar in 4Q as well as some additional BoJ adjustments will may see it push back down to 130.

Just a small note, I did not enter the trade yet. For now it remains an idea

Sep 5, 2023

Trade closed manually

I closed manually after the BOJ intervened a day later. Locked in with profits with stops

I may open it again, but after more consideration, the BOJ might not intervene again this year. I can explain and write a whole paragraph

But actually, probably nobody reads this

Sep 5, 2023

Note

USDJPY forecast upgrade to 150 & 155 in 3-6 months, respectively. If you're unfamiliar with forex terms "base" and "quote," this forecast means the US dollar will go up against the yen.

Higher for Longer
The main reason for this bullish view on the USD dollar is that the interest rates remain "higher for longer" than previously anticipated, meaning they will either keep their interest rates higher for longer and make no rate cuts. as the Federal Reserve continues to tighten its monetary policy in response to strong economic growth and inflation pressures.

Higher interest rates often attract foreign investments looking for the best return on investments in the safest assets, which strengthens the currency

So, the Federal Reserve will likely keep interest rates high or hike again to combat inflation and cool down the economy. Higher interest rates generally strengthen a country's currency.

Negative Interest Rate Policy (NIRP) in Japan
The Global Investment Research division at Goldman Sachs expects the Bank of Japan to continue its negative interest rates policy (NIRP).

Negative interest rates typically make a currency less attractive to investors because they essentially have to pay to hold the currency. This discourages foreign investment in the yen and weakens it.

Real rate differential
The difference between the US and Japanese interest rates is also known as the "real rate differential". The real interest rates adjust the nominal interest rate set by central banks for the rate of inflation, giving a more accurate picture of the actual return an investor would earn by investing in the currency.

It's a key driver of the USDJPY exchange rate, as it reflects the relative attractiveness of holding one currency over another.

Higher real interest rates typically attract foreign investment. If the U.S. has a higher real interest rate than Japan, then investors are more likely to invest in U.S assets because they can earn a better "real" return on their investments compared to what they could get in Japan.

Because higher real interest attracts foreign investment, they also usually benefit from a stronger currency. If more people want to invest in the U.S., they have to buy dollars to do so. That increases demand for the dollar and strengthens it relative to other currencies like the yen.

The real interest rate isn't just important for investors, it's also important for anyone who borrows or lends money. A higher real interest rate in the U.S. means that loans are more expensive, and savings accounts offer better returns relative to what's available in Japan.

Rest is on my blog. I'm not sure if I violate tradingview rules if I post