Guotai Junan: All POPULAR TRADEs are UNWINDing

According to the Wise Finance APP, Guotai Junan Securities released a research report stating that after the Bank of Japan raised interest rates, the Japanese yen continued to appreciate, breaking through the important level of 150 against the US dollar. In terms of exchange rates, the appreciation of the Japanese yen is somewhat abnormal: the interest rate differential between the yen and the dollar remains huge, and the appreciation may be a significant retreat for yen carry trades. In addition, the sharp decline in the US stock market led by the technology sector largely indicates a massive unwinding of carry trades; the weaker-than-expected US employment data released last week triggered the Sam Rule once again, but more data confirmation is still needed. Gold and Bitcoin are the only two mainstream trades that are still "alive".

Last week was a super central bank week, with the Federal Reserve and the Bank of Japan taking turns, which was exciting enough. However, the consecutive sharp drops in the stock market have made investors start to doubt their previous directions.

Raising or lowering interest rates is just a drop in the bucket. Last week, the Bank of Japan unexpectedly raised interest rates by 15 basis points, which was beyond market expectations, but the Bank of Japan's tightening direction is certain, so the rate hike was not surprising. Behind the monetary policy actions are feedback on the economy and inflation. Therefore, Powell's remarks after last week's interest rate meeting also indicated the Federal Reserve's basic attitude of "the direction of rate cuts is certain, but the magnitude and timing are uncertain".

What really makes the market nervous is the continuous appreciation of the Japanese yen, breaking through the important level of 150 against the US dollar after the Bank of Japan raised interest rates. In terms of exchange rates, the appreciation of the Japanese yen is somewhat abnormal because the interest rate differential between the yen and the dollar is still huge. Therefore, behind the yen's appreciation, there must be other forces at play. The more easily accepted view in the market is a significant retreat of yen carry trades.

The sharp decline in the US stock market led by the technology sector largely indicates a massive unwinding of carry trades. Many investors may think that their trading structures are not related to carry trades, but from the operation of financial markets, there has been a large-scale reversal of previously popular trades. Even if investors may not have directly participated in carry trades, they have been influenced by carry trades to some extent and have often accelerated the unwinding of these trading positions.

When financial markets experience such turmoil, many people will consider the financial markets in conjunction with the real economy. Especially after the weaker-than-expected US employment data released last week, the Sam Rule was triggered again, and investors began to worry about a possible economic downturn in the US. The Sam Rule was born in the globalization era of the past 30 years, and today's US economy has probably undergone several structural changes compared to back then. From this perspective, whether the US economy is heading towards a recession still requires more data confirmation.

Gold is still shining, which may be the only or one of the only mainstream trades that are still "alive", with Bitcoin being stable. As the US dollar falls, gold rises, and this logic seems very solid. Of course, when the US dollar rises, gold's performance remains strong as well. So in the end, gold stands out