Market News

The yen carry trade, where US investors borrow Japanese yen, due to its low interest rate environment, to purchase US monetary assets for a profit, has backfired on some investors as the Bank of Japan began to increase interest rates. A sell-off resulted, in part, due to this phenomenon having an impact on the US market.

Yahoo Finance markets and data editor Jared Blikre joins Catalysts to break down the Japanese yen carry trade and its impact on the US stock market.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

A key week to look at the flows of markets as we saw both the best and worst day in the S and P 500 since 2022 here to walk us through some of the biggest winners and losers of the week.

We've got our very own Jared B Hey, Jared, thank you.

Mad to talk about flows.

This week, we got to talk about the Yen again.

And by the way, that was just a great interview on the Yen Carry Trade.

And this is actually what we're looking at.

This is a chart that goes back to the beginning of the century shows when the yen K is break, breaking up or blowing up.

And that's when we get one of these big spi to the downside.

We just got, one wasn't as big as the March 20 pandemic spike or eight or seven in the global financial crisis.

But here's why that matters.

Japan is sitting on ultra, ultra low interest rates.

It actually raised interest rates last week and that's kind of the source of this problem, but they're still very low relative to the United States and Europe.

So here we have the US 525 to 550 basis points.

And then we have Japan all the way down here at 0.25% or 25 basis points.

So people have been borrowing in the lower yield or lower costing currency and investing in the higher yielding currencies that is now reversing.

Thanks to the Bank of Japan's decision last week and let me just show you and share some of the insights by Michael Hartnett's team over a Bank of America talking about the zeitgeist today.

Here's what the Boj said on July 31st, the bank will continue to raise the policy interest rate going forward a week later.

They say the bank will not raise its policy rates when markets are unstable painfully.

This conclusion, Wall Street has now stopped the Boj hiking Wall Street's October or August September goal now appears to be bossing the fed into big rate cuts and that's when we get into the bond vigilantes.

So here's the effect that we had on flows this week, high yield bonds, largest outflow since 23.

So investors shunning risk credit risk there, bank loans also big outflows tips largest inflow since April 22.

I think that's an inflation page inflation play.

People looking to the fed, possibly lowering rates by a larger amount.

Japanese stocks, guess what?

They bought the dip European stocks.

Investors are shunning that risk market and then financials the biggest outflow since November of 23.

Not surprising there.

And then tech 1/6 week of inflows, that means tech inflows have been continuing for six weeks.

So not a big disruption in that trade, which is pretty impressive.

I thought it would close out here.

I just wanted to go over a chart of the yen.

We just had that fantastic explain the yen carry trade.

We are looking at 146 here as a potential level.

Let me just show you the 10 day chart that was a year to date.

Uh We get one, here's a trend line.

We are now breaching the trend line about to uh breach this 146 level.

We get down by 141.

That's when things start blowing up again.

So we want to keep that in mind throughout the day probably into next week.

Uh But right now, uh we'll have to see if any momentum develops guys.

All right, Jared.

Thanks so much for breaking down where we're seeing some of those inflows this week.