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Global Carry Trade Unwind Extends As Peso Sinks, Yen Surges

The yen pushed higher Monday, while the Mexican peso’s slump extended as traders continued to unwind emerging market carry trades.

Japanese 10,000 yen and 5,000 yen banknotes arranged for a photograph in Tokyo, Japan, on Friday, May 10, 2024. The Bank of Japan offered to purchase a smaller amount of government bonds in a regular operation on May 13 than it did on April 24 as it seeks to reduce its presence in the country’s debt market. Photographer: Noriko Hayashi/Bloomberg
Japanese 10,000 yen and 5,000 yen banknotes arranged for a photograph in Tokyo, Japan, on Friday, May 10, 2024. The Bank of Japan offered to purchase a smaller amount of government bonds in a regular operation on May 13 than it did on April 24 as it seeks to reduce its presence in the country’s debt market. Photographer: Noriko Hayashi/Bloomberg

The yen pushed higher Monday, while the Mexican peso’s slump extended as traders continued to unwind emerging market carry trades.

The peso fell as much as 2% against the dollar in Asian trading, extending its loss into a third straight day. The slump came as the yen surged as much as 0.8% while China’s yuan strengthened, two currencies used to fund carry trades. 

Global Carry Trade Unwind Extends As Peso Sinks, Yen Surges

The sudden appreciation in funding currencies has damaged the popular carry strategy, which typically involve traders borrowing at lower rates in developed markets to invest in higher-yielding assets in the emerging world.

What’s a Carry Trade? When Does It Not Make Money?: QuickTake

“Over recent months this strategy has hit a brick wall both on the asset side (e.g. Mexican election results in June undermined the peso) and since last month, on the yen-funding side, too,” wrote ING strategists including Chris Turner in a note Friday. Higher volatility has also “forced the downsizing of positions.”

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