On August 5, 2024, on the streets of Tokyo, a pedestrian walked past a monitor showing the exchange rate between the US dollar and the Japanese yen.
Richard A. Brooks | AFP | Getty Images
this Dollar One market strategist said it is likely to continue lower against the yen in the coming months, especially since there may be a lot of room for yen-funded “carry trades” to operate.
Geoffrey Yu, senior Europe, Middle East and Africa market strategist at the Bank of New York, said on CNBC's “Street Signs Europe” program on Wednesday that the dollar's weakness against a variety of major currencies is expected to continue until the end of the year.
His comments followed another sell-off in the dollar on Tuesday as market participants prepared to release preliminary revisions to U.S. labor data on Wednesday. These figures can present “Downside risks” said analysts at Dutch bank ING.
Reuters reported that at around 11:50 a.m. London time on Wednesday, the dollar-yen exchange rate rose 0.6% to 146.09 yen, shortly after the dollar-yen exchange rate fell below the closely watched 145 yen level for the first time since January 6. The yen has risen sharply in recent weeks, indicating continued unwinding of carry trades.
An arbitrage trade is an operation in which investors borrow currency at low interest rates and reinvest the proceeds in higher-yielding assets elsewhere.
Forex strategies have become extremely popular in recent years, particularly as investors expect the yen to remain cheap and Japanese interest rates to remain low.
Asked how much the dollar could fall, Yu responded: “It depends on what (currency) it's against. USD/JPY, you know, pick a number, right? So, we'd be happy to see it on 130 A higher (JPY) handle, at least until year-end, so more downside.
He added, “The yen actually remains very undervalued based on our data. I think $1.05 EURUSD is probably a more reasonable level, although still quite aggressive by current standards. But that would be a target for my forecast.” It's towards the end of the year because the numbers really start to turn negative.
Yu said the dollar could move higher against the yuan as the People's Bank of China “needs to loosen” monetary policy.
“But against high-yielding currencies like the Mexican peso, I expect the dollar to actually outperform,” he said.
What’s next for the yen carry trade?
Yen-financed carry trades begin to unwind sharply Earlier this month, the Bank of Japan raised interest rates, strengthening the yen and causing a sharp sell-off in global markets.
Strategists have since been reluctant to give a clear answer to the rapid unraveling of the arbitrage trade, warning investors that the unwinding is far from over.
The Bank of New York's Bank of New York echoed that view on Wednesday.
“We continue to see significant unheld yen short positions in our data, particularly from the cross-border community. We did see yen cash demand and liquidity needs in the early weeks of August Surge, but with OK,” Yu said.
“I think once the Fed's path affects prices, we'll be faced with a change of government in Japan and we'll set medium-term policy USD/JPY. That could trigger further easing, but not in a situation like this occur.