Investing.com – The majority of short selling in the yen is likely to be liquidated quickly, according to UBS, which should reduce future volatility.
The carry trade on the yen has been a major factor behind much of the market volatility recently, as the Bank of Japan’s decision to raise interest rates last week and expectations of cuts from the Federal Reserve have prompted many players to reassess their long-term positions.
The global interest trade involves investors borrowing money in a place where interest rates are low and using it to invest elsewhere in assets that generate a higher return.
For many years, this was closely linked to the Japanese yen, as the Japanese government kept interest rates near zero in an attempt to stimulate a stagnant economy.
One of the markets’ main concerns is to gauge the size of the global carry trade in the yen and how risky it may be, analysts at UBS said in a note dated Aug. 7.
“We have classified yen trading into three categories: ‘fast money’, ‘semi-fast money’ and ‘fixed money’. We believe that short-term yen trades of fast money have been completely liquidated. In our view, the unwinding of the latter two groups should be gradual and not disorderly.”
“Our current forecasts are ¥147, ¥147, ¥143 and ¥140 for September 2024, December 2024, March 2025 and June 2025, respectively,” UBS said.
“With the recent rally in USD/JPY, investors should look to sell the pair on rallies above 147 JPY, given our longer-term bearish bias.”
At 06:10 ET (10:10 GMT), the USD/JPY pair was down 0.4% at 146.10 yen, after falling sharply to a seven-month low of 141.67 yen at the start of the week.