Yen Carry Trade & Rate Hike (BoJ)
The USD/JPY pair is likely to fall toward the 140 level as two key factors weigh on the market: the unwinding of the yen carry trade and growing fears of a rate hike by the Bank of Japan (BoJ).
For years, Japan’s ultra-low interest rates made the yen a favorite currency for carry trades, where investors borrow yen cheaply to invest in higher-yielding assets elsewhere. However, as global markets face increased volatility and central banks tighten monetary policy, these trades are becoming less attractive. Investors are now unwinding these positions, which involves selling off foreign assets and buying back yen, strengthening the currency and putting downward pressure on USD/JPY.
At the same time, the BoJ has hinted it may soon raise interest rates as inflation in Japan shows signs of persistence. Even the expectation of a rate hike reduces the appeal of the dollar against the yen, as higher Japanese rates would narrow the interest rate differential. This makes the yen more appealing and further accelerates the unwinding of carry trades.
With these factors aligning, the USD/JPY pair potentially faces significant downward momentum, making a move toward the 140 level increasingly likely.
For years, Japan’s ultra-low interest rates made the yen a favorite currency for carry trades, where investors borrow yen cheaply to invest in higher-yielding assets elsewhere. However, as global markets face increased volatility and central banks tighten monetary policy, these trades are becoming less attractive. Investors are now unwinding these positions, which involves selling off foreign assets and buying back yen, strengthening the currency and putting downward pressure on USD/JPY.
At the same time, the BoJ has hinted it may soon raise interest rates as inflation in Japan shows signs of persistence. Even the expectation of a rate hike reduces the appeal of the dollar against the yen, as higher Japanese rates would narrow the interest rate differential. This makes the yen more appealing and further accelerates the unwinding of carry trades.
With these factors aligning, the USD/JPY pair potentially faces significant downward momentum, making a move toward the 140 level increasingly likely.
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