Japanese Yen Carry Trade Remains Unwound Amid Interest Rate Hike Expectations

The Japanese Yen carry trade remains intact despite recent market movements. The USD/JPY pair has fallen to six-month lows, trading just above 154.00. Speculators added 28.9K Yen short contracts in the week ending September 1, but this does not indicate a liquidation of the carry trade.

The Prime Minister's economic adviser now expects interest rate hikes this month and by January, which could weigh on the economy. The Bank of Japan's (BoJ) policy rate is 1%, while the target range in Washington is 3.50% to 3.75%. Swaps put a quarter point from the BoJ at close to 97%, and fed funds futures put a quarter point from the Federal Reserve on September 16 at 58%

The unwind of the carry trade looks different across the tape, with leverage coming off selling high-beta positions first. This has led to a repricing of what Yen funding will cost, not a liquidation of what it funds. Both banks hiking and the gap ending where it started indicates that the focus is on the path, not the level of the gap.