Despite recent turbulence in the Mexican peso and Indian rupee due to ongoing election activities, Japanese retail investors continue to flock to emerging market currencies for carry trades, borrowing low-interest yen to reinvest in higher-yield assets such as the US dollar.
According to data from forex margin trading company Gaitame.com, as of June 4, the proportion of long positions held by traders in the Mexican peso/yen pair stood at a staggering 96%, only a slight decrease of 1 percentage point from the previous week.
Gaitame.com Research Institute Director Takuya Kanda noted that Japanese retail investors typically engage in carry trades with Mexican pesos using low leverage and small amounts, thus the impact of peso depreciation is not substantial.
As major central banks around the world begin to enter a cycle of interest rate cuts, expectations for the Federal Reserve to cut rates are intensifying, which could put pressure on carry trades. A series of weak economic data from the United States recently boosted the yen/dollar pair to 154.55, its highest level in three weeks.
However, the interest rate differential remains significant. Hideki Shibata, Senior Strategist at Tokai Tokyo Research Institute, emphasized that demand for yen carry trades always exists. He suggested that when the yen/dollar pair reaches 155, it will be an opportune moment to switch to dollar assets.
Citi analysts, led by Dirk Willer, also see a positive outlook for yen carry trades. In their report, they highlighted that while carry trades have historically performed well during rate-cutting cycles, investors currently need more time to adjust their positions. Nevertheless, they believe the resurgence of carry trades is inevitable.
