Markets remain vulnerable to unwinding of yen 'carry trade'

Following market correction

Market volatility is not over as the global unwinding of the yen’s 'carry trade' may lead to further market instability, traders and analysts have warned.

During periods of high inflation and interest rates, a carry trade allows companies and investors to borrow capital via a currency with a low interest rate, such as the Japanese yen, which a London-based futures trader told Investment Week has been "the underlying driver of the sell-off". This low-yielding currency is then converted to fund investments in higher earning assets, such as US stocks, allowing traders to profit from the interest rate differential between the two currencies.  The Bank of Japan's decision to raise its interest rate to 0.25% on 31 July, coupled with some poor...