JPMorgan Chase: Yen arbitrage trading positions have not been fully closed yet, only half completed at the moment

The "Black Monday" caused a major shake-up in the global financial markets, with the massive unwinding of yen carry trades being considered as one of the key factors leading to the stock market crash. On August 6, JPMorgan Chase issued another warning, stating that only half of the unwinding process of yen carry trades has been completed so far. As the yen remains one of the most severely undervalued currencies, there is still further room for unwinding in recent carry trades. "It's not over yet," said Arindam Sandilya, Co-Head of Global Foreign Exchange Strategy at JPMorgan Chase, in a media interview. "In the speculative investment field, the unwinding of carry trades has only been completed by 50%-60%." Yen carry trades, in essence, involve investors borrowing low-interest yen and then investing in higher-yielding assets to profit from the interest rate differential. The recent stock market plunge is partly due to the reversal of carry trades triggered by the narrowing of the US-Japan interest rate differential. The unexpected rate hike by the Bank of Japan last week and the near full pricing of a rate cut by the Federal Reserve in September have diminished the appeal of the most popular "sell yen, buy dollars" carry trade, prompting investors to convert their dollar assets back into yen. Analysts believe that the massive sell-off of carry trade positions was initially triggered by the rate hike by the Bank of Japan, but concerns about global economic growth have further exacerbated the situation in the past few days, leading to intensified volatility. Due to concerns about a US economic recession and the rate hike by the Bank of Japan, the yen has experienced sharp fluctuations, causing significant losses for carry trades over the past week. On Monday, the intensified selling of global risk assets led to a rebound in the USD/JPY exchange rate towards the key level of 140. The yen against the dollar briefly rose above the 142 level yesterday, with an intraday increase of over 3%. Currently, the yen exchange rate has retraced slightly and is hovering around the 145 level. Goldman Sachs believes that the yen carry trades are unlikely to return to previous levels, and the yen's appreciation trend is not yet over. Sandilya pointed out, "Due to the technical damage caused by the short-term sharp fluctuations to investment portfolios, carry trades are unlikely to quickly return to the levels before the yen rebound. The best-case scenario for the market is to stabilize around the current levels, with at most a slight rebound. However, in many similar situations, trends tend to persist, albeit at a slower pace." On August 2, Citigroup also stated that the end of yen carry trades would require "the Fed to cut rates three times, at least six months." The institution noted that historically, the threshold for the US dollar to yen to transition from an uptrend to a downtrend is around a 4.75% US-Japan interest rate differential, which is currently at around 5.25%. Achieving the threshold level may require the Fed to cut rates three times, a process that would take approximately six months.