Financial encyclopedia

The yen, which has always maintained a low interest rate, has attracted many investors to carry out Carry Trade, that is, borrowing yen at a low interest rate and reinvesting it in assets with a higher rate of return until the Bank of Japan raised interest rates at the end of July and set off an Unwinding of yen positions. Arbitrage and open position are two closely related concepts. It has an important influence on the global foreign exchange market, especially in the period when interest rates and exchange rates fluctuate greatly:

arbitrage

Borrow at a low interest rate in yen, and then convert these funds into high-interest currencies or assets such as Australian dollar, US dollar or emerging market currencies to earn spreads. This trading strategy is usually particularly popular when the global economy is stable and interest rates in other countries are high while Japan maintains low interest rates. It is considered that the exchange rate risk is low and the spread income can be obtained stably.

Yen open position

It refers to the process that arbitrage traders are forced or take the initiative to close their positions due to changes in the market environment, that is, selling high-interest assets and buying back yen to return yen loans. This usually has a significant impact on the market, especially in the case of large-scale warehouse demolition.

Trigger reason:

Changes in interest rate policy: With the rising inflation in Japan, the Bank of Japan was forced to raise interest rates to 0.25% in early August, the borrowing cost of yen increased, and the profit margin of arbitrage trading narrowed, prompting investors to close their positions.

Exchange rate fluctuation: when investors open their positions and return the yen, and the funds are exchanged back to the yen, which drives the yen to appreciate, the yen debt cost of arbitrage traders will rise, resulting in a decrease in investment returns or even losses. In order to prevent further losses, investors will quickly open their positions.

Risk mood change: When the global market uncertainty increases or financial crisis occurs, investors usually avoid risky assets, sell high-interest currencies and buy back the yen, which will lead to a sharp appreciation of the yen and further aggravate the pressure of opening positions.

Market impact: When large-scale yen open positions occur, it will often lead to violent market fluctuations. The yen may appreciate rapidly, while the sold high-interest currencies or assets may depreciate sharply. Such fluctuations may spread to global financial markets and cause broader market turmoil.

In an optimistic market, the yen carry trade will increase and the yen will depreciate. However, when the market sentiment becomes pessimistic, the yen will appreciate rapidly, which will lead to large fluctuations in the exchange rate, especially when global financial uncertainty intensifies.