The Rise and Fall of the Yen Carry Trade: What’s Next for the Yuan?
The yen carry trade, a popular investment strategy, has been making headlines recently. However, its collapse has left many investors wondering what’s next for the yuan carry trade. In this article, we’ll explore the differences between the two trades and what experts are saying about the yuan’s future.
What is the Yen Carry Trade?
The yen carry trade involves borrowing Japanese yen at a low interest rate and investing in higher-yielding assets, such as the Mexican peso or Brazilian real. This strategy relies on the expectation that the yen will weaken against other currencies, allowing investors to profit from the difference in interest rates.
The Collapse of the Yen Carry Trade
The yen carry trade crashed and burned this month as Japan’s currency surged. A Bank of Japan interest-rate hike bolstered the local currency, which in turn hammered the value of higher-yielding targets. Investors cashed out, leading to a selloff in risk assets.
What’s the Difference Between the Yen and Yuan Carry Trades?
The yuan carry trade is less well-known, but it’s likely to be more immune to shocks. China’s central bank keeps its monetary policy dovish, making it more attractive for investors to borrow yuan and invest in higher-yielding assets. The yuan isn’t fully convertible, which limits the size of the yuan carry trades compared to yen ones.
Key Differences
- Currency Convertibility: The yuan isn’t fully convertible, while the yen is.
- Investor Base: The yuan carry trade is mainly held by Chinese exporters and multinationals, while the yen carry trade is dominated by speculators.
- Monetary Policy: China’s central bank keeps its monetary policy dovish, while Japan’s central bank has been tightening.
Why Invest in the Yuan Carry Trade?
Experts say that the yuan carry trade is attractive due to China’s struggling economy and the People’s Bank of China’s expected easing of policy. The ongoing flush of offshore yuan liquidity conditions may also make it hard for market participants to resist reengaging in carry trades.
Trade Recommendations
Several financial firms are advising clients to borrow yuan and invest in higher-yielding assets. Citigroup Inc. recommends betting on the Mexican peso and Brazilian real against the yuan and yen in the options market. Goldman Sachs Group Inc. and Nomura Holdings Inc. are also recommending investors short the yuan against a trade-weighted basket of other currencies.
Conclusion
The yuan carry trade is likely to be more resilient than the yen carry trade due to China’s dovish monetary policy and the limited convertibility of the yuan. While the total size of yuan-funded carry trades may be limited, experts believe that borrowing yuan will continue to be a profitable method of funding carry positions.
FAQs
Q: What is the yen carry trade?
A: The yen carry trade involves borrowing Japanese yen at a low interest rate and investing in higher-yielding assets.
Q: Why did the yen carry trade collapse?
A: The yen carry trade collapsed due to a Bank of Japan interest-rate hike, which bolstered the local currency and hammered the value of higher-yielding targets.
Q: What’s the difference between the yen and yuan carry trades?
A: The yuan carry trade is less well-known, but it’s likely to be more immune to shocks due to China’s dovish monetary policy and limited convertibility of the yuan.
Q: Why invest in the yuan carry trade?
A: Experts say that the yuan carry trade is attractive due to China’s struggling economy and the People’s Bank of China’s expected easing of policy.
Q: What are some trade recommendations for the yuan carry trade?
A: Several financial firms are advising clients to borrow yuan and invest in higher-yielding assets, such as the Mexican peso and Brazilian real.
Author: fortune.com
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