The market volatility doesn't seem to have ended yet!
This afternoon, there was a sudden major fluctuation in the Japanese market. The Japanese yen suddenly surged against the US dollar in the afternoon, leading the rise of G10 currencies. The Japanese yen appreciated by 1% against the US dollar, once again breaking through the important level of 146. At the same time, the Japanese stock market experienced a sharp drop, with the decline rapidly expanding to 1.5%, and the extent of South Korea's sell-off also increased to around 1%.
As of the close of the Japanese stock market, the Nikkei 225 index closed down 1.77% at 37388.62 points, ending a 5-day streak of gains. In terms of individual stocks, Toyota Motor, Hitachi, Tokyo Electronics, RECRUIT, Shinetsu Chemical Industry and other stocks fell more than 3%. At the same time, the main contract of the consolidation index (European line) continued to decline, with the decline expanding to over 10%.
In early August, the global stock market shock was caused by the collapse of the carry trade framework due to the appreciation of the yen. In early trading today, all Asia Pacific currencies soared, while the US dollar and Japanese yen remained relatively stable. However, in the afternoon, the Japanese yen suddenly gained strength. Does this mean that there will be problems with yen carry trades again? How many positions have been closed in this type of transaction before?
Sudden plunge
This afternoon, the Japanese yen suddenly appreciated significantly, with the US dollar falling sharply by over 1.3% against the Japanese yen and breaking through the important level of 146. In the morning session, the US dollar against the Japanese yen had reached the level of 148.
Industry insiders say that as traders prepare for Bank of Japan Governor Kazuo Ueda's speech in parliament on August 23 and Federal Reserve Chairman Powell's speech at Jackson Hole, the yen has been rising due to the widespread weakness of the US dollar. Vice Governor of the Bank of Japan, Shinichi Uchida, took a more dovish stance at the July meeting, implying that policymakers will not raise interest rates in times of market instability. The expectations for the future of domestic politics in Japan have become blurred as Japanese Prime Minister Fumio Kishida has stated that he will not run for the presidency of the ruling Liberal Democratic Party again in September. But this morning, Shigeru Ishiba, who supports interest rate hikes, announced his candidacy, which may be a major reason for the yen to gain support.
In fact, non US currencies have all experienced significant increases today, and the Korean won has also risen significantly. The US dollar fell more than 1.3% against the Korean won, while the Chinese yuan, Indonesian rupee, Malaysian currency, Singapore dollar, Thai baht, and other currencies all experienced significant gains. But with the rise of the Japanese yen, the equity market experienced a change, with Japanese stocks plummeting in the afternoon and the Nikkei 225 index plummeting by over 1.7% at one point. The South Korean stock index also experienced a decline of nearly 1%. The trend of the three major US stock futures indexes is also relatively weak.
It is evident that the market is concerned about the possibility of another round of carry trades closing positions. On August 5th, due to the sharp rise of the Japanese yen, the entire market plummeted, and the Nikkei index fell more than 10% that day. But with the depreciation of the Japanese yen, market sentiment has eased. The Nikkei 225 index rose 8.7% for the entire week last week, rebounding 21% from the "Black Monday" on August 5th, but still dropping 9.9% from its high on July 11th. Today, the Japanese yen continues to appreciate, and the market may be concerned that another appreciation of the yen may trigger the occurrence of closing positions in carry trades.
How much impact does it still have?
So, how big is the scale of yen carry trades?
According to data from the Bank for International Settlements (BIS), as of March, the Japanese banking industry has lent approximately $1 trillion in Japanese yen to foreign borrowers, an increase of 21% from 2021. A significant portion of the growth in cross-border yen lending is in the interbank market, in addition to lending to non bank financial institutions such as asset management companies. In addition, as of the first quarter, the international net investment of Japanese investors reached 487 trillion yen (approximately 3.4 trillion US dollars), an increase of 17% compared to three years ago.
UBS Global Strategist James Malcolm estimated that the size of yen arbitrage trading established since 2011 is approximately $500 billion, with about half of it growing in the past two to three years. He believes that investors have closed approximately $200 billion in positions in the past few weeks, accounting for about three-quarters of the positions he ultimately expects to be closed.
After the global stock market crash on August 5th, the Goldman Sachs forex team's position rating indicated that the short positions in the Japanese yen had been largely liquidated, indicating that the market was about to bottom out; The CFTC position data of Faxing in July also showed that most of the yen short positions have been closed.
However, short positions in the Japanese yen have increased by approximately 30% to 40% in the past week, mainly from hedge funds and high net worth investors. According to Sina Finance, after better than expected retail sales data in the United States, Japanese yen arbitrage trading has significantly returned, with multiple accounts selling Japanese yen and buying Australian dollars and British pounds.
On August 16th, Nomura International observed that different types of investors began to sell the yen again and transfer funds to other high-yield assets. This indicates that corporate clients and hedge funds who were once keen on arbitrage trading are re entering the market. According to data from ATFX Global Markets, short positions in the Japanese yen have increased by approximately 30% to 40% in the past week, mainly from hedge funds and high net worth investors. Antony Foster, the head of G-10 currency spot trading at Nomura in London, revealed that multiple accounts are selling Japanese yen and buying Australian dollars and British pounds instead.
With the appreciation of the Japanese yen, will such transactions undergo a reversal, and will there be other unexpected events that trigger more stampede? Analysts believe that the next major event should be the Federal Reserve's interest rate cut starting in September. At present, the market expects that the probability of a 50 basis point interest rate cut by the United States in September has exceeded 70%, and the US dollar has also begun to fall sharply. The foreign exchange market may also react in advance.