Yen Strength Shifts Carry Trade Focus to Yuan and Canadian Dollar

The Japanese yen has surged about 6% against the dollar since late July, driven by Bank of Japan intervention and expectations of rate hikes. This has made the yen less attractive for carry trades, where investors borrow in low-yield currencies to invest in higher-yield ones.

Traders are now eyeing the Chinese yuan and Canadian dollar as alternative funding currencies. The yuan benefits from growing offshore bond issuance, while the Canadian dollar's carry-to-volatility ratio is becoming comparable to the yen's.

The Bank of Japan is expected to raise rates this week, but Japanese rates will remain low compared to global peers, so the yen carry trade may not disappear entirely.