The yen carry trade, once blamed for a dramatic global market selloff in 2024, has staged a powerful comeback and is reshaping currency markets worldwide.
Goldman Sachs strategist Stuart Jenkins wrote in a recent report that betting on carry “bears more relevance in the Group of 10 foreign-exchange space than at almost any point since 2000.”
The carry trade involves borrowing in low-interest-rate currencies and deploying that capital into higher-yielding assets in other countries, profiting from the gap between the two rates.
The strategy came under intense scrutiny in August 2024, when a sudden unwinding of carry trade positions triggered a sharp and disorderly selloff across global financial markets.
Yet conditions have since shifted in favor of the trade’s revival, with Goldman Sachs (GS) pointing to a combination of wide yield differentials and subdued currency volatility.
Interest rates across the world’s biggest developed economies have settled at high and varied levels, creating unusually wide yield gaps that make the strategy particularly attractive for investors.
A JPMorgan Chase (JPM) index shows foreign-exchange volatility is hovering near its lowest levels since 2020, further reducing the risk of sudden, painful unwinds like the one seen in 2024.
G10 foreign-exchange carry trades have returned roughly 8% this year, outperforming global bonds, gold, and Bitcoin, though still trailing equity markets, according to data compiled by Bloomberg.
Goldman (GS) currently favors funding carry trades using the Japanese yen, Swiss franc, or euro in the months ahead, citing each currency’s low borrowing costs relative to higher-yielding alternatives.
The yen remains Goldman’s top long-term funding candidate, with Japan’s currency already trading near a 40-year low against the US dollar, a level that makes the borrowing economics highly favorable.
Goldman has revised its yen forecast to 165 per dollar from a prior estimate of 155, placing the bank among the most bearish forecasters tracked in a Bloomberg survey.
The bank acknowledges the persistent threat of official intervention from Japanese authorities, but expects the yen to continue weakening absent a significant shift in the macroeconomic backdrop.
Wide interest rate differentials between Japan and the United States remain a structural driver underpinning Goldman’s bearish view on the Japanese currency over the coming year.
For hedge funds and institutional traders, the resurgence of the carry trade represents both a significant opportunity and a reminder of the concentrated risks the strategy can create during periods of market stress.
