Bearish Market of JPY Conducive to Carry Trade

The Tokyo Olympic Games came to a successful ending under the climate of a frosty reception from Japanese people. However, instead of boosting Japans economy, the Games witnessed the steady slump of the JPY exchange rate over the past week, the aftermarket of which is so weak that it commands the attention of traders conducting carry trade.

For the year 2021 as a whole, the figure for JPY/USD has declined by over 6%, making JPY the weakest compared to currencies of industrial powers. The Japanese economy has slightly improved by 2%, same as the increase seen by stock markets in Mainland China and Hong Kong, against the backdrop of the U.S. stocks repeatedly hitting new all-time highs and the Bank of Japan (BOJ) continuously intensifying the depreciation of JPY. Throughout history, countries are less likely to see their economy fueled by hosting the Games. The Athens Olympics and Paralympics in Greece in 2004 can be an obvious example in the contemporary era. The country is still haunted by the aftermath of a debt crisis breaking out in wake of the Games.

Losses borne by the Tokyo Olympic Games may be the heftiest unseen in history because of a one-year delay, coupled with the absence of tourists and spectators. In addition to the fallout from the Games, the recent resurgence of Covid-19 nationwide can rock the economy further in the country. In addition, the situation of JYP is exacerbated under the context of the interest-rate differential widening between bond interests of the U.S. and Japan and the U.S. 10-year bonds skyrocketing. The reason for this surge is that the capital is invested into the U.S. stocks rather than the U.S. bonds due to the risk aversion in decline caused by the strong performance of the American economy, together with the U.S. stocks repeatedly reaching record highs.

Apart from BOJ, the banks of many countries will enter into the phase of finishing QE policy and the period of interest-rate hikes, bound to set off a wave of operating carry trade. Among them, BOJ has implemented negative interest rates without any pressure due to the increase in interest rates, making JPY an appropriate financing currency for carry trade. It is predicted that sell orders will flock to JPY under the trend of carry trade in the future, inflicting proper pressure on it.

Politically, general elections will be held before mid-October in accordance with the Japanese Constitution. It is estimated that the popularity rating of Yoshihide Suga will be only 28%, leading him to a large chance of failure. Hence, influenced by the political uncertainty and the aforementioned economic adversity, JPY seems to enter into a bearish market. At present, countries tightening the pressure of monetary policies include Canada, New Zealand, Australia, and the U.S., whereas AUD is too weak to attract traders in conducting carry trade. As for the strong USD recently, USD/JPY can be the first choice, followed by the currency pair comprised of JPY and NZD, a currency seeing interest-rate hikes on the horizon. The last one is CAD/JPY.