Yen Surge Sparks Carry Trade Fears Despite Morgan Stanley Reassurance

The yen has surged by 7% against the US dollar since reaching a 40-year low in early August, sparking fears that trillion-dollar carry trades may be unwinding. Morgan Stanley strategists argue that while the strength of the yen is a significant factor, it is not enough to disrupt emerging market carry trades on its own.

The surge in the yen's value has been driven by rising expectations for interest rate hikes by the Bank of Japan and public comments from U.S. Treasury Secretary Bessent supporting a stronger yen. Market bets on a BOJ rate hike in September have surged to 98%, with some analysts predicting three consecutive hikes.

Morgan Stanley strategists point out that the global growth outlook, direction of global equity markets, and individual fundamentals of major emerging market countries are more important determinants of emerging market carry trade performance than the yen's trajectory. They maintain a positive view on these factors, citing robust country-specific fundamentals, attractive carry yields, and solid global growth momentum.

The team led by James Lord emphasizes that equity market performance remains the core anchor for emerging market carry trades, stating that 'global economic growth, global equity market performance, and bottom-up trends in major emerging markets have a greater impact on the performance of emerging market carry trades than the movement of the yen.'