Yen carry trade could stop rising in Q2 2025 - Barclays
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YEN CARRY TRADE COULD STOP RISING IN Q2 2025 - BARCLAYS
The U.S. dollar keeps rising against the yen, a trend that has defied the slight tightening of rate differentials.
Barclays analysts flag that the 2y3m Japan overnight index swap rose from 0.40% to 0.65% on expectations for Bank of Japan rate hikes, with no positive impact on the Japanese currency.
The carry trade keeps rising as rate differentials are too large - 520 bps according to Barclays - and some narrowing is not enough to prevent investors from borrowing in yen and buying more profitable assets.
However, this story could end sooner or later as the Bank of Japan is expected to tighten its monetary policy while the Federal Reserve should cut rates.
"We estimate the domestic-overseas rate differential needed to contain the yen depreciation exceeding that differential at around 4.0-4.5%, and we expect that level to be reached around the second quarter 2025," they argue.
They see the "FX-neutral rate differential" at 4.25% while forecasting an acceleration of USDJPY dip-buying from 4.0-4.5% and speculative positions from 4.5% or higher.
Equities have little or nothing to do with the recent yen weakness. "Even when factoring in the pullback in safe-haven currency demand due to this year's global equity rally, it is not possible to account entirely for the yen's weakness," Barclays analysts say.
They estimated the "FX-neutral carry" as the level where "forex returns are expected to be zero based on a multivariate regression of each currency's return versus the greenback."
(Stefano Rebaudo)
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