The Japanese yen has appreciated approximately 6% against the dollar since late July, making it the best-performing G10 currency. This shift has led speculators to reverse their positions, moving from a net short of around 92,200 contracts to a net long of about 10,800 contracts by September 8, as reported by the Commodity Futures Trading Commission.
The yen's strength is attributed to hawkish signals from the Bank of Japan regarding potential rate hikes, which contrasts with previous interventions that failed to stabilize the currency. Treasury Secretary Scott Bessent's warning against betting against the yen further supports its current strength.
As a result, investors are exploring the Chinese yuan and Canadian dollar as viable options for carry trades. Bank of America notes that while the yuan's capital account is more restricted than Japan's, there has been significant issuance in offshore yuan bonds.
Meanwhile, TD Securities highlights the Canadian dollar's favorable carry-to-volatility ratio, making it an appealing alternative despite recent tariff tensions with the U.S. Analysts suggest that while the yen's appreciation may lead to a rotation in carry trades, low Japanese interest rates will likely keep the yen relevant in this market