J.P. Morgan said that three-quarters of global carry trades are unwound and reiterating that “clock is ticking for the G10 carry trade”, according to Bloomberg.
Returns in Group-of-10, emerging market and global carry trade baskets tracked by the bank have fallen about 10% since May, quantitative strategists Antonin Delair, Meera Chandan and Kunj Padh wrote in a note to clients. The moves have wiped out the year-to-date returns and significantly cut into profits accumulated since the end of 2022.
FX asset manager Q-CAM wrote that while the USD fell sharply on the back of the US’ July labor market report, fears of recession seem overdone.
“In our view, uncertainties and low liquidity dominate in the short-run, but relative growth performances and monetary policy decisions remain key for the overall direction in FX markets. We expect, that the broad USD will stay in the current range,” the firm wrote.
“JPY and CHF have clearly been outliers. Both currencies were massively oversold and underperformed in the first half of the year. The reversal since July has basically brought them back to where they started in January. Risk aversion could drive the CHF higher, but we expect that the SNB [Swiss central bank] is more likely to resist that trough interventions or possibly even further interest rate cuts. The JPY carry trade has lost its appeal in an environment of heightened risk aversion, but as we pointed out before, Japan is not out of the woods and the unwind of the carry trade is probably largely over.”
Risk Magazine reported that margin calls jumped threefold as global markets sold off, citing the head of prime brokerage of a European bank. Clearing executives told a similar story of massive volumes, margin breaches and collateral calls. Futures Commissions Merchants (FCMs) claim there are no client defaults.
The Fed’s reverse repo facility (RRP) sunk below $300 billion, wrote Bloomberg. Counterparties parked $292 billion on Tuesday August 6 as balances drop amid resurgence in bill supply.