KUALA LUMPUR, Dec 4 (Bernama) -- Bursa Malaysia rallied to close broadly higher on Wednesday amid strong buying interests mainly in utility and technology stocks, with the benchmark index gaining 0.44 per cent. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) rose 7.13 points to 1,614.09 from Tuesday’s close of 1,606.96. The index opened marginally higher at 1,606.97 and moved between 1,606.53 and 1,616.03 throughout the day. Advancers thumped decliners 727 to 381 on the broader market, with 522 counters unchanged, 781 untraded and 10 suspended. Turnover advanced to 3.60 billion units valued at RM3.30 billion versus 3.32 billion units valued at RM3.30 billion on Tuesday.
The yen carry trade, an investment strategy that involves borrowing in yen at low interest rates and investing in higher-yielding assets, is regaining popularity after a turbulent year. Despite the risks, low volatility in currency markets and wide interest rate differentials are drawing investors back into the trade.
Key Drivers of the Revival
Growing Short Positions on the Yen
- Bearish bets on the yen surged to US$13.5 billion in November, up from US$9.74 billion in October, according to Bloomberg analysis.
- Investors are leveraging Japan's ultra-low interest rates to fund investments in higher-yielding assets globally.
Wide Interest Rate Differentials
- Bank of Japan (BOJ): Benchmark rate remains at 0.25%, with potential for only modest hikes.
- US Federal Reserve: Despite a recent rate cut to 4.5%-4.75%, US yields still far outpace Japan's rates.
Profitability of Yen-Funded Trades
- Yen carry trades targeting major and emerging-market currencies have returned 45% since 2021, outperforming the S&P 500’s 32% gain over the same period.
Potential Risks and Market Dynamics
Volatility Concerns
- The yen’s unexpected surge last week highlighted the ongoing risks for investors engaging in the trade.
- The strategy thrives on low volatility, which could be disrupted by geopolitical and economic shifts.
Trump's Policies
- President-elect Donald Trump's economic policies, including tariffs and tax cuts, could drive volatility in currency markets.
- Trade tensions with China, Canada, and Mexico might make traditional carry trade currencies like the Mexican peso less attractive.
BOJ and Fed Policies
- The BOJ’s Governor Kazuo Ueda has hinted at potential rate hikes in December, which could narrow the rate gap.
- Meanwhile, the Fed’s cautious pace of rate cuts may sustain the differential, keeping the carry trade viable.
Challenges to the Trade
Verbal Interventions:
- Japan’s Ministry of Finance has issued warnings about one-way currency moves, signaling potential intervention.
Structural Pressures on the Yen:
- Large capital outflows have kept the yen among the weakest performers in the Group of 10 currencies.
Geopolitical Risks:
- Rising uncertainty from Ukraine’s war and the new Trump administration may weigh on global assets tied to carry trades.
Analysts' Perspectives
- Alvin Tan, RBC: "The large rate differential will keep the yen as a funding currency, provided volatility stays low."
- Charu Chanana, Saxo Markets: BOJ rate hikes won’t close the yield gap, leaving room for the carry trade to thrive.
- Jane Foley, Rabobank: While the carry trade is gaining traction, confidence and momentum remain weaker than earlier in the year.
Outlook for 2024
- The carry trade could regain strong momentum by January, depending on BOJ and Fed policy decisions in December.
- A dovish BOJ stance or a slower Fed rate-cut cycle would enhance the trade's appeal.
- Investors are likely to monitor key economic data and geopolitical developments for further clarity.
The yen carry trade remains a high-risk, high-reward strategy, with the potential to influence global markets significantly.
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