The yen carry trade recently experienced a dramatic collapse as Japan’s currency surged unexpectedly. However, it remains more stable, largely due to China’s central bank maintaining a dovish monetary policy. This strategy is expected to be more resilient to market shocks, offering a safer alternative for investors. Unlike the yen carry trade, which is driven by speculators, the yuan carry trade primarily involves exporters and multinationals.
Yuan carry trade involves borrowing yuan to invest in higher-yielding assets. This strategy capitalizes on the differences in global interest rates. Despite the recent turmoil in the yen-funded trades, the yuan-funded carry trade has remained profitable. For example, borrowing yuan and investing in a basket of emerging-market currencies has yielded a 0.5% return this quarter, even as yen-funded alternatives have dropped around 7%. This highlights the yuan's resilience in the face of global financial shifts.
One significant difference between the yuan and yen carry trades is that the yuan is not fully convertible. This limitation helps Chinese authorities control the economy and restricts the size of yuan carry trades. Additionally, yuan-funded trades are largely held in dollars by Chinese exporters and multinational corporations, which became profitable following the Federal Reserve’s rate hikes in 2022.
Moreover, the People’s Bank of China (PBOC) has the necessary tools to prevent an excessive buildup of speculative positions in yuan carry trades. This adds an extra layer of security for investors, making it as a more controlled and potentially profitable option.
Financial institutions continue to recommend the yuan carry trade as a viable strategy. Citigroup advises betting on the Mexican peso and Brazilian real against the yuan in the options market. Goldman Sachs and Nomura Holdings also recommend shorting the yuan against a basket of other currencies. Despite the challenges faced by China’s economy, the yuan carry trade remains an attractive option for investors looking to capitalize on global interest rate differences.
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Discover why the yuan carry trade remains resilient. Learn how this strategy capitalizes on global interest rate differences.
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