Yen's Surge Forces Traders to Ditch Carry Trade
The yen's surge has disrupted the carry trade strategy that has shaped global markets for years. Traders are now seeking alternative currencies to use as funding sources, weighing liquidity against cheaper funding.
A carry trade involves borrowing funds in a currency with low interest rates and buying assets denominated in a currency with higher returns. The yen was the most popular funding currency, but its status is now in question due to Japan's economic recovery from deflation and zero interest rates.
The Swiss franc and Canadian dollar are potential replacements for the yen. However, both currencies have their own set of challenges. The Swiss franc has become an overcrowded position, while the Canadian dollar depends on the outcome of the trade conflict between Canada and the US.