BBVA: BOJ Rate Hikes Could Shift Carry Trade Funding Currency Toward the Yuan
nashnova research
BBVA's Asia cross-asset strategist Dariusz Kowalczyk says offshore renminbi could replace the yen as Asia's top carry-trade funding currency by Q4 — but only if the PBOC is willing to tolerate the consequences.
What is a carry trade, and why has the yen dominated?
A carry trade works by borrowing in a low-rate currency and investing in higher-yielding assets, pocketing the spread.
Japan's ultra-low — even negative — rates for decades made the yen the world's go-to funding currency.
This means → whichever currency offers the lowest borrowing cost and deepest liquidity wins the carry-trade role by default.
Why might the renminbi take over?
The BOJ has hiked rates three times since early 2025, raising the cost of borrowing yen; meanwhile the PBOC keeps rates low to support growth.
The rate gap is narrowing — the yen's "cheap money" edge is shrinking while the renminbi is becoming relatively cheaper.
In plain terms = the yen used to be Asia's cheapest currency to borrow; the renminbi is catching up, and carry traders follow the cheapest money.
Is offshore renminbi liquid enough?
Kowalczyk acknowledges that the offshore renminbi market is smaller than the yen market in trading volume.
But he argues liquidity is already sufficient to handle carry-trade flows — the pool exists, it is just shallower.
This reflects years of offshore renminbi market development; it is no longer the "shallow end" where large trades cannot execute.
What is the biggest variable?
Kowalczyk flags that the real gatekeeper is not the market itself — it is whether the PBOC will tolerate these flows.
Carry trades generate heavy selling pressure on the renminbi, pushing the currency down — a direct clash with the PBOC's tight exchange-rate management.
This means → even if market conditions align, the switch cannot happen unless the central bank is willing to let it. Policy intent is the real on/off switch.
What would this mean for the renminbi's exchange rate?
In the near term, exporters converting dollar earnings back into renminbi provide support for the currency.
But a surge in offshore funding demand would create material downward pressure, potentially slowing the renminbi's appreciation over the medium to long term.
In plain terms = exporters are pumping blood into the renminbi while carry trades would be draining it — the two forces work against each other.
Where does this stand right now?
A BOJ policy board member this week publicly raised the prospect of sharp or consecutive rate hikes, prompting yen strength.
The key checkpoints ahead: does the BOJ actually keep hiking + does the PBOC stay accommodative?
This reflects that the potential switch remains at the "plausible scenario" stage — the diverging policy paths of the two central banks are what turns speculation into reality.
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