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Friday, June 21, 2024

USDJPY Increased to its Highest Level Since the 1990s

Key Takeaways:

  • The carry trade that has lasted since 2021 continues to become more profitable. Sentiment also continues to decline, especially from the last COT Report.
  • Asset Managers increased their short positions while decreasing their long positions.
  • A carry trade is a strategy where an investor borrows a currency with a low-interest rate and invests the proceeds in a currency with a higher interest rate.

Sentiment and Possible Cause

USD/JPY Increased to a level not seen since the 1990s, as shown in the picture above. The carry trade that has lasted since 2021 continues to become more profitable. Sentiment also continues to decline, especially from the last COT Report.

You can view the latest COT Report Here.

Asset Managers increased their short positions while decreasing their long positions. Sentiment among asset managers continues to decrease for the JPY:

COT Data Asset Managers

Leveraged Funds decreased their long positions and short positions, however, the majority of positions are still short:

COT Data Leveraged Funds

The recent decline in JPY is most likely due to the carry trade when investors/traders buy or sell a currency to benefit from its interest rate differential.

What is the Carry Trade?

A carry trade is a strategy where an investor borrows a currency with a low-interest rate and invests the proceeds in a currency with a higher interest rate. The goal is to capture the difference in interest rates, known as the interest rate differential, while also potentially benefiting from any appreciation in the invested currency.

The key to a successful carry trade lies in the stability of the currency pair and the sustainability of the interest rate differential.

A Carry Trade Opportunity In recent years, the USD/JPY currency pair has been an attractive option for carry traders. This is primarily due to the divergence in monetary policies between the United States Federal Reserve (Fed) and the Bank of Japan (BoJ).

The Fed has been gradually raising interest rates and normalizing its monetary policy in response to a strengthening U.S. economy. Higher interest rates in the U.S. have made the dollar more attractive to investors seeking higher yields.

In contrast, the BoJ has maintained an ultra-loose monetary policy, keeping interest rates near zero or even in negative territory. This is part of Japan’s efforts to stimulate its economy and combat deflationary pressures. The low-interest-rate environment in Japan has made the Japanese yen a popular funding currency for carry trades.

By borrowing the Japanese yen at low-interest rates and investing in U.S. dollar-denominated assets with higher yields, investors benefit from the interest rate differential.

Lazarus
Lazarushttps://ljlnews.com
Publisher and editor of LJLNews. I am a Stock Market enthusiast, with an interest for politics. I hope you enjoy reading the articles! Contact me at: Lazaruslucas@ljlnews.com

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