Yuan Emerges as Alternative in Carry Trades Amidst Yen Volatility
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Yuan Emerges as Alternative in Carry Trades Amidst Yen Volatility
- The Chinese yuan is gaining traction as a funding currency for carry trades, a strategy where investors borrow in low-interest-rate currencies to invest in higher-yielding assets, due to recent volatility in the Japanese yen.
- Strategists from institutions like Citigroup Inc. and Malayan Banking Bhd. are identifying the yuan as a strong alternative as the yen experiences a surge, particularly in early September 2026, driven by Bank of Japan interest rate hike signals.
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The Chinese yuan is increasingly being considered by strategists as a viable funding currency for carry trades, a shift primarily driven by the recent surge and increased volatility in the Japanese yen. Historically, the yen has been a dominant currency for such trades, where investors borrow at low interest rates and invest in assets with higher returns. However, signals from the Bank of Japan (BOJ) regarding potential interest rate hikes have led to a strengthening yen, eroding the profitability of these traditional carry trades.
This change in the yen’s dynamics, particularly observed in early September 2026, has prompted investors to seek alternatives. For instance, the yen climbed to a six-month high below 153 per US dollar as markets anticipated further BOJ tightening. The prospect of the BOJ normalizing its monetary policy could lead to increased volatility, further discouraging the use of the yen in carry trades.
The yuan, with its controlled depreciation and relatively low interest rates, is emerging as an attractive option. The People’s Bank of China (PBOC) has been deliberately guiding the yuan to a weaker position to support the economy and boost exports. This managed depreciation, combined with low domestic interest rates, suggests the yuan could maintain a path of weakness without immediate concerns of high volatility, making it suitable for carry trade strategies. However, the yuan carry trade also presents unique risks, including tight management of its value by Chinese authorities and less robust liquidity compared to major currencies like the yen.