Goldman Sachs: Yen Carry Trade Unwind Has More Room to Go
Goldman Sachs strategists are predicting that the recent unwinding of the carry trade involving the Japanese Yen (JPY) still has further to go, despite significant moves already witnessed in the market.
The recent sell-off in the Yen has raised concerns about the extent of the carry trade unwind and how long it may continue. Limited data availability makes it challenging to predict, but there are some key indicators to consider.
According to a note from Goldman on Friday, recent CFTC data shows a decrease in net short positions among non-commercial investors from nearly $15 billion to just $1 billion. However, this data does not provide the full picture.
Goldman Sachs points out that foreign equity holdings among Japan’s stock investment trusts, public pensions, and other large investors have increased significantly. This surge in investments leaves approximately $1 trillion at risk of losses if the Yen continues to appreciate, potentially driving more repatriation flows and impacting both equity markets and the Yen value.
The strategists believe that the recent correlation between the USD/JPY sell-off and Nasdaq declines is more likely due to various factors supporting the Yen rather than deep leverage from the carry trade.
While a rapid and substantial strengthening of the Yen is seen as unlikely by Goldman Sachs unless there is a significant risk of a US recession, any sharp tightening of financial conditions in Japan could disrupt domestic inflation and hinder the Bank of Japan’s rate hike plans.
In conclusion, investors should remain cautious and monitor the Yen carry trade unwind closely, as it could have significant implications for global markets and economies.
