Interview, Other
How a popular trade collapsed — and why it matters
- The interest rate differential between Japan and the US is projected to narrow as the Bank of Japan raises rates and US economic activity concerns push US rates lower.
- Current market pricing anticipates rapid Federal Reserve cuts, while realized volatility is expected to remain elevated for a period, hindering immediate re-entry into pro-cyclical long risk trades.
- Speculative unwind activity involving hedge funds and CTAs is largely concluded after record yen shorts reduced to flat levels, though institutional flows from Japan are stickier and expected to persist.
- Further yen appreciation is forecast to drive the remaining institutional unwind, while Japanese retail investor margin calls are estimated to be mostly resolved.
- Market stabilization for the yen is projected for mid-November following the US election, with implied volatility returning to a normal regime.
- Normalization of market conditions supporting a return to carry trade strategies may take weeks or months, contingent on US growth outlook, upcoming payrolls data, and the FOMC meeting.
- A scenario exists where the US avoids recession, restoring a benign disinflation narrative that could allow the yen to stabilize and investors to retain foreign asset holdings despite yield differentials.
- Investors may shift carry trade funding currencies from the yen to the Chinese renminbi if the case for low rates there strengthens, though the carry trade strategy itself is expected to remain a market feature well beyond the yen's current role.
- Future results are not guaranteed, Goldman Sachs has no obligation to update this information, and past performance does not indicate future outcomes.