The yen carry trade, which has roiled global markets, is making a comeback, with the currency falling more than 5 per cent against the dollar in two weeks.
Nomura Holdings, Japan's largest brokerage, has found investors are again borrowing yen to invest in other higher-yielding assets. There are signs that investors and hedge funds that have been keen on carry trading are getting back into the trade.
August began when Japan's hawkish monetary policy, combined with market concerns about weakness in the U.S. economy and poor jobs reports, pushed the yen to a seven-month high against the dollar. But the trend has quickly reversed since August 5, with the yen down more than 5 per cent against the dollar in two weeks.
Antony Foster, head of 10-country spot trading at Nomura in London, said there was a clear return to carry trade after better-than-expected retail sales data in America. Several accounts have sold Japanese yen to buy Australian and British pounds. U.S. Treasury yields rose Thursday (Aug. 15) as good economic data led traders to lower their expectations for the U.S Federal Reserve to cut interest rates this year.
The yield on the 10-year U.S. Treasury note rose to 3.956 percent Thursday from 3.84 percent. Two-year US bond yields also rose to a peak of 4.126 per cent from 3.966 per cent.
The resurgence of carry trading underscores the appeal of this strategy, which can bring quick profits to investors. However, this type of investment strategy is also risky. Before the yen's appreciation last month, traders had bet against the dollar that the yen would weaken. However, the Bank of Japan has shown the risks of such a trade by raising interest rates in response to rising inflation.