What changed with the yen
After officials stepped into currency markets in late July, LSEG data indicate the yen has strengthened by around 6% against the dollar, putting it at the front of the G10 pack. The swing has been sharp enough that traders flipped to a net long stance in the week ending Sept. 8, with net longs near 10,800 contracts compared to about 92,200 shorts the prior week, per the Commodity Futures Trading Commission.
Hawkish signals from Bank of Japan board members, suggesting faster rate increases are possible, have added fuel to the rally in a way the previous joint U.S. and Japan action did not. And Treasury Secretary Scott Bessent has been warning against betting on yen weakness, declaring last week, "I am the house now." For carry traders who borrow in cheaper currencies and invest in higher-yielding ones, a stronger yen is not ideal.
Why China and Canada are getting a look
Bank of America sees the yuan as a potential funding substitute. Appearing on "Squawk Box Asia" Friday, Claudio Piron - who leads Asia forex and rates - remarked, "I like to quip that Japan is becoming like China was 20 years ago, and China is becoming like Japan" on deflation. He noted China's capital account remains more closed than Japan's, but pointed to robust issuance in CNH bonds and growing interest from multinationals to raise money and issue in those offshore markets. While the offshore yuan trades more freely than its onshore counterpart, it still largely tracks the onshore rate managed by the People's Bank of China.
Last month, China left its benchmark lending marks unchanged for the 15th straight month, keeping the one-year LPR at 3% and the five-year at 3.5%.
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The Canadian dollar is also drawing attention. In a report last week, TD Securities' forex team said they expect it to become a more appealing funding currency relative to the yen, and noted its carry-to-volatility ratio is "already comparable to the Japanese yen." They added the loonie weakened after the latest U.S.-Canada tariff spat and could still slide as the shock filters through sentiment, production, and ultimately domestic data. Earlier this month, the Bank of Canada opted to hold its policy rate steady at 2.25%.
What this could mean for your portfolio
The yen carry trade isn't disappearing, but it may evolve. "We could see some rotation," said OCBC forex strategist Chris Wong, adding that "even after another BOJ hike, Japanese rates will still be low by global standards." The BOJ meets for two days starting Wednesday, with markets looking for a 25 basis point move to 1.25%. For comparison, the Fed's target range sits at 3.50%-3.75%, the Bank of England is at 3.75%, and the European Central Bank is at 2.5%. Those gaps, coupled with the yen's rise, are reshaping where carry traders source their funding.
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