Carry Trade Unwinding Pushes Yen to Monthly High as BOJ Rate Hike Expectations Continue to Build
nashnova research
The yen rallied roughly 2.5% this week — its biggest weekly gain in a month — as markets price in a large BOJ rate hike in September, triggering a systematic unwind of carry trades that is hammering high-yield currencies across the board.
How sharp is this yen rally?
The yen hit 155.25 per dollar in Friday's Asian session, just above the 155.20 low touched after the August joint Japan-U.S. intervention.
The weekly gain of about 2.5% is the largest in nearly a month; the dollar index fell roughly 0.7% over the same span, settling at 99.01.
This means → the yen is clawing back losses built up during months of carry trades — borrowing cheap yen to buy higher-yielding assets — and the speed has caught the market off-guard.
What signal did the BOJ actually send?
Governor Kazuo Ueda and board member Hajime Takata both struck hawkish tones this week, explicitly flagging the possibility of a sizeable hike at the September 17–18 meeting.
Swap markets now fully price a 25 bp hike in September and roughly three more of the same size by July next year. This means → the pace would be markedly faster than the average of two hikes a year since early 2024.
Two-year JGB yields climbed about 14 bp this week, directly reflecting the repricing of the rate path.
How far has the carry-trade unwind gone?
In plain terms = a carry trade means borrowing cheap yen, converting it into a high-yield currency, and pocketing the interest gap. Now that the yen is rising and the gap is shrinking, the trade loses money in reverse — so everyone is rushing to close out.
CME data show call-option volume on yen vs. dollar on Thursday ran more than 2.5× put volume, confirming a large-scale short-covering wave.
CFTC data as of August 25: leveraged funds held 81,619 contracts of net yen shorts; asset managers held 18,284. A substantial portion remains open. This means → if the BOJ does hike in September, another wave of forced unwinds is waiting.
Which currencies are caught in the blast radius?
The Brazilian real, South African rand, and Mexican peso all fell more than 1% against the yen on Thursday — high-yield currencies under broad pressure.
This reflects the systemic nature of the carry-trade unwind: it is not just a dollar-yen story but a global reassessment of the risk of borrowing in yen.
Japanese exporters also stepped up dollar selling, adding further lift to the yen.
What do institutions think — panic or rational repricing?
Nomura's Sagar Sambrani: "Easy carry is over. The scale of cross-border flows from Japan to the U.S. may have changed materially."
State Street's Masahiko Loo: "This doesn't feel like a short squeeze — it feels like the market is cautiously re-evaluating a more hawkish BOJ path. Markets are finally accepting Japan may extend policy normalisation to 2027."
In plain terms = the consensus across desks is not that one force is driving the move, but that broader market sentiment is turning.
What comes next?
The September 18 BOJ decision is the key checkpoint — if a hike lands and forward guidance stays firm, the large remaining yen short base faces further forced unwinds.
Fed Governor Waller struck a relatively dovish tone Thursday, pulling the implied probability of a Fed September hike back to around 50% and weighing on the dollar.
This means → the two central banks' policy paths are converging — Japan hiking, the U.S. on hold — and the narrowing rate differential should keep supporting yen strength in the near term.
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