The renewed volatility in the yen exchange rate means that arbitrage traders may find it difficult to catch their breath during Thanksgiving.
From the South African rand to the Canadian dollar, those shorting the yen to arbitrage these currencies for high-yield assets have suffered losses of over 2% in just the past five trading days. Looking back over the past month, the situation has been even more severe, with investments shorting the yen to go long on the Brazilian real and Swedish krona down approximately 4% and 3.4%, respectively.
As the US Thanksgiving holiday approaches, liquidity is decreasing, and the risk of sharp fluctuations in the yen is rising—testing the nerves of investors hoping to recover losses or double down on their bets.
Kyle Rodda, senior market analyst at Capital.com, stated, 'This trade will keep you awake at night. In the days leading up to the weekend, the market will be very tense, and if you are taking on the risk of this arbitrage trade, there is almost no opportunity to catch your breath given the current volatility.'
This week, the yen has appreciated over 2% against the US dollar, thanks to a sudden rise in market expectations that the Bank of Japan may raise interest rates again next month. The large interest rate differential between Japan and other economies has been the cornerstone of the lucrative yet potentially 'explosive' yen financing arbitrage trades.
Strategists noted that this week’s accelerated decline of the US dollar against the yen clearly shows that options accumulated at 153 were easily digested, with almost no defensive buying. Additionally, there is almost no room for upward movement until a large concentration of options at 143.5 begins to clear a week later.
President-elect Trump may issue new social media posts, potentially amplifying market volatility, which also undermines the appeal of yen arbitrage trades that typically thrive in low-volatility environments. After Trump posted that he had a very productive conversation with the Mexican president, the Mexican peso rose over 1% against the yen on Thursday.
Rodrigo Catril, a strategist at the National Australia Bank's Sydney branch, noted, 'Arbitrage traders dislike uncertainty. Therefore, the reasons for selling are the uncertainty of tariffs and the increasing likelihood of Trump suddenly posting policy statements on social media.'
Another key factor is the significant change in Japan's interest rate expectations. Overnight index swaps show that investors currently expect a 60% probability of the Bank of Japan raising rates in December, up from 32% earlier this month.
Jane Foley, head of foreign exchange strategy at Rabobank's London office, wrote in a research report, 'The market has been buoyed by the belief that the Bank of Japan may raise rates in December, and they may be unwilling to disappoint.'
Article shared from: Jinshi Data