Goldman Sachs: Faster BOJ Rate Hikes Could Trigger More Yen Carry-Trade Unwinding
Goldman Sachs said Japan’s largest foreign-exchange intervention in 15 years triggered a sharp reduction in tactical yen carry-trade positions, exceeding the initial unwinding that followed the July 2024 intervention. However, strategist Karen Reichgott Fishman said in a report that the macroeconomic backdrop is still providing less support for the yen than it did in the summer of 2024. The dollar-yen exchange rate has given back half of its initial decline. Despite the sharp reduction in speculative positions, more unwinding could still occur “if conditions are right.” If macroeconomic and market conditions support a stronger yen, the positions could even turn net long yen, as they did from July to August 2024. Markets currently see about a 75% probability that the Bank of Japan will raise interest rates in September. A faster pace of tightening could allow the yen to “remain strong for longer without a change in the global economic growth environment.” More structural unwinding would require Japanese investors to repatriate unhedged overseas assets. However, returns on overseas investments remain attractive, and official portfolio-flow data have not yet shown signs of such a rotation. Without faster BOJ rate hikes, capital repatriation or another catalyst to drive sustained yen strength, the impact of the intervention could weaken further and eventually leave the yen at risk of falling to new lows.
However, strategist Karen Reichgott Fishman said in a report that the macroeconomic backdrop is still providing less support for the yen than it did in the summer of 2024. The dollar-yen exchange rate has given back half of its initial decline.
Despite the sharp reduction in speculative positions, more unwinding could still occur “if conditions are right.” If macroeconomic and market conditions support a stronger yen, the positions could even turn net long yen, as they did from July to August 2024.
Markets currently see about a 75% probability that the Bank of Japan will raise interest rates in September. A faster pace of tightening could allow the yen to “remain strong for longer without a change in the global economic growth environment.”
More structural unwinding would require Japanese investors to repatriate unhedged overseas assets. However, returns on overseas investments remain attractive, and official portfolio-flow data have not yet shown signs of such a rotation.
Without faster BOJ rate hikes, capital repatriation or another catalyst to drive sustained yen strength, the impact of the intervention could weaken further and eventually leave the yen at risk of falling to new lows.