Yen's Sudden Surge Stuns Carry Trade Investors

The Japanese yen's recent surge has caught the carry trade crowd off guard. The currency hit its strongest level since February at 152.89 per dollar on Tuesday, reversing a downward trend that saw it loitering at around 160 less than a week earlier.

This sudden change in fortunes for the yen is attributed to expectations of an interest rate hike from the Bank of Japan next week and signs of capital repatriation.

Analysts believe that stop-loss orders were triggered around certain levels, accelerating the move in the dollar/yen. This has led to a further unwind of the carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher yields.

According to Jefferies analysis of data from the Bank for International Settlements, cross-border yen borrowing ballooned to a record 360 trillion yen ($2.35 trillion) as of March, making it the largest carry-trade build-up of the past three decades.