Leveraged Currency Trades
Two weeks ago, we explained that one key currency trade that analysts have been watching is the carry trade with the Japanese yen (JPY). This trade involves selling the JPY short and using the proceeds to buy assets — like U.S. equities — denominated in other currencies. This trade weakens the value of the JPY.
The weekly U.S. dollar versus Japanese yen (USD/JPY) chart shows that the USD has been getting stronger compared to the JPY for the past couple years thanks to both the quantitative easing (QE) program of the Bank of Japan and the carry trade.
Chart of the U.S. Dollar versus Japanese Yen
Last month, the carry trade started to unwind a bit, which is concerning for U.S. equity investors. However, the USD appears to be regaining some strength, causing the USD/JPY to level off. This confirms that it is still too early to worry about the imminent demise of the carry trade.