Why are Yen in high demand to sell? The reason "carry trades" move the foreign exchange market

Why is the yen easy to sell? Why Carry Trades Move the Foreign Exchange Market

In the FX market,

"Yen carry trades are active."

"Carry trade unwinding."

You may come across such news.

However,

"What is a carry trade?"

"Why is the yen being sold?"

Have you ever wondered?

Actually, this carry trade has been one of the representative investment methods that has moved the forex market for many years.

Carry trade isborrowing funds in a low-interest-rate currency and investing those funds in a high-interest-rate currency to exploit the interest rate differential.

Japan has pursued a long-standing low interest-rate policy.

Therefore, many foreign investors have borrowed yen at low interest and invested those funds in currencies with relatively higher interest rates, such as the U.S. dollar, Australian dollar, and New Zealand dollar.

In other words, selling yen to buy other currencies creates a tendency for yen depreciation.

For example, when the U.S. policy rate is high and Japan's rate is low, funds seeking to take advantage of that rate differential flow into the market.

As a result, dollar buying and yen selling progress, and the dollar/yen rate often rises.

However, there are also cautions with this trading.

While profits are easier to earn when the market is stable, the situation can change drastically if the financial markets become highly turbulent.

If global stock prices fall sharply or geopolitical risks intensify, investors move to risk aversion, and the yen that had been borrowed is bought back all at once.

This is called the **"carry trade unwinding"**.

In such a scenario, rapid yen appreciation in a short period is not uncommon.

In the current dollar-yen market, the interest rate differential between Japan and the United States remains a key theme.

Market participants compare BoJ and the Fed's monetary policy and carefully assess whether carry trades will continue or unwinding will occur.

In other words, not only interest rates but also market sentiment and risk environment play significant roles.

In fundamental analysis, it's important not to simply think that "a rate difference means yen will weaken," but to consider whether funds are still flowing into the market or starting to return.

If you see the word "carry trade" in the news, it is not merely jargon.

It is a crucial clue to where investors around the world are moving their funds.

When looking at the USD/JPY in the future, please also add the viewpoint of whether carry trades are a tailwind or unwinding is likely.

That deeper perspective will be a powerful tool to understand market trends.

Today as well, investors around the world are moving funds to the next market while weighing the balance between interest rate differentials and market psychology.

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