USD/JPY at a Crossroads: Will US CPI Data Spark a Reversal?
USD/JPY remains a crucial market to watch as it is heavily influenced by the carry trade, which presents significant USD risk. This can have a ripple effect on other markets such as EUR/USD, GBP/USD, and AUD/USD.
The Bank of Japan has intervened multiple times since the start of the USD/JPY carry trade over five years ago. However, even though the Fed did not hike interest rates in 2021, USD/JPY started to gain, and this rally went parabolic in 2022 as the Fed began to actually hike.
Since then, the carry has remained tilted towards the long side of the pair, with many longs still holding on. This includes both positional trades and hedges on underlying carry trades from banks or hedge funds that borrowed funds cheaply in Japan and invested those funds elsewhere.