Goldman Sachs Exchanges How a popular trade collapsed — and why it matters
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Aug 13, 2024 
Kamakshya Trivedi, head of Global Foreign Exchange Strategy at Goldman Sachs, and Praneet Shah, co-head of Global G10 FX Options Trading, dive into the recent unwinding of the Japanese yen carry trade. They explain its history, complexities, and how a crowded trade can impact global markets. The duo discusses risk management challenges and macroeconomic dynamics, emphasizing the interconnectedness of markets. Their insights into how economic conditions shape investment strategies provide a fascinating look at the potential future implications for investors.
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Carry Trade Mechanics
- Carry trades involve borrowing low-interest currency and investing it in higher-interest assets.
- Investors profit from the interest rate spread and potential currency appreciation.
Yen Carry Trade Popularity
- Yen carry trades became popular after 2016 due to Japan's negative interest rates, attracting hedge funds and real money investors.
- Increased use in 2023 was driven by the "immaculate disinflation" narrative.
Yen Carry Trade Unwind
- The yen carry trade unwound due to rising Japanese interest rates and concerns about US economic activity.
- This caused the interest rate differential to shrink and the yen to appreciate against the dollar.