When two popular trades, such as buying U.S. big tech stocks and selling the Japanese yen, are unraveling at the same time, investors naturally think they are somehow related.
There is now worry that the unwinding of yen-funded carry trades would wreck investors’ frothy exposures to U.S. technology and AI-related companies. After all, the 11% surge in the Japanese currency since early July has been in lockstep with the Nasdaq 100 Index’s 13% maximum drawdown.
With a carry trade, an investor borrows in the currency of a country with low interest rates, like Japan and China, and puts his or her money in one that provides considerably higher returns. In recent years, the yen has been the most popular funding currency because of the Bank of Japan’s zero-rate regime.
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