Case Study (Carry Trade Unwinding): Short USD/JPY - 11 Jul to 24 Jul 2024
1. Macro Environment Background and 2. Scenario Analysis
- Macro Environment: Mirrors Case Study (Global Macro): Short Gold - 23 Apr 2024 to 3 May 2024 — rate differentials fuelled carry trades using the Yen for higher-yielding assets.
- Scenario Analysis: Positive correlations suggest carry unwinding risks, with BoJ policy shifts and Fed rate cuts likely triggering a short USD/JPY opportunity.
3. Strategy Selection
Despite BoJ intervention on April 29, 2024, carry trade activities quickly resumed, pushing the Yen past 160 by early July. Japanese policymakers expressed rising concerns over the Yen's sharp depreciation and warned of excessive speculative pressures.
Stronger Japanese economic data (June-July 2024) and rising inflation supported Governor Ueda's hawkish stance, signalling a potential rate hike at the July 31, 2024 BoJ meeting.
In contrast, U.S. economic data in early July weakened, with the ISM Manufacturing and Services PMI, along with labor data, all falling below expectations, strengthening the case for Fed rate cuts and increasing the likelihood of a reversal in U.S.-Japan rate differentials.
Our strategy framework for Yen carry trades indicated the strong likelihood of impending action by the BoJ:
Yield spread consideration: Rising BOJ rate hike expectations coincides with Fed toward dovish.
BOJ language on intervention: At the higher level of “concern rises”
As the dollar traded near 160 yen, Tokyo authorities issued daily warnings of intervention, citing “excessive yen weakness” misaligned with fundamentals and expressing “deep concern” over the yen’s rapid, one-sided decline.
Intervention window for maximum effect: upcoming US inflation data and BOJ meetings
Narrative Risk: Low
4. Asset Class Selection
We expressed our view on a potential BoJ intervention by shorting USD/JPY, as its price levels were overstretched, and Yen-short covering triggered by data releases indicated narrowing rate differentials.
Our indicators showed nervous Yen-short covering during key data releases, raising expectations of Fed easing and increasing the likelihood of carry trade unwinding. The chance of BoJ intervention surged ahead of the July 11, 2024, U.S. CPI release, especially if the data disappointed.
With BoJ hike expectations rising and Fed cuts likely, narrative risk was low. USD/JPY was overbought after breaking 160, with RSI and MACD divergence indicating an overextended market.
Speculative positioning at historical lows made the pair vulnerable to a sharp reversal in the event of intervention, mirroring past episodes and reinforcing our confidence in low positioning risk.
Position Risk: Low
5. Execution and Ongoing Monitoring
We saw this as an opportune time to establish a short position on USD/JPY, supported by low-risk ratings for both BoJ intervention narratives and USD/JPY positioning, along with key indicators:
- The upcoming week presented an ideal window for BoJ intervention, potentially triggering a carry trade unwinding and negatively impacting USD/JPY.
- Yen net positioning was at historical lows, with technical indicators signalling significantly stretched price levels.
Entry point:
- 2024-07-11: Short USDJPY 161.48
Exit point:
- 2024-07-24: Exited 153.41
