Carry trade performance is expected to remain strong in the New York market. While the effect of intervention aimed at containing yen depreciation is fading, the advantage of trades exploiting interest-rate differentials is once again coming into focus.
According to a strategist at a major US securities firm, the effect of Japanese authorities' currency intervention in pushing up the yen is gradually fading, but carry trades targeting interest-rate differentials between currencies are still expected to deliver strong performance. The view was expressed that the policy of continuing to support other assets would remain in place even at the cost of intervention accompanied by a weaker dollar.
As resistance to the use of unconventional policy tools has declined, the possibility of avoiding difficulties such as fiscal and monetary tightening has increased, and it was suggested that, in some cases, extreme options that could come at the expense of the dollar may also be considered. However, the profitability of carry trades has not been undermined even by intervention, and performance through August was on track for its strongest pace since 2010.
The global economic backdrop is expected to support carry strategies in the current environment, while funding in low-yielding currencies is picking up amid rising US real yields. As the yen-strengthening effect fades, the view was expressed that trades focused on interest-rate differentials are likely to regain the upper hand.