The yen carry trade relies on exploiting the interest rate differential between Japan (low) and foreign countries (high), adjusted by the exchange rate variation ROI_Carry (r_foreign - r_domestic) - ΔS_fx + α(Leverage) - β(Costs).
Historically, this model has generated annualized returns of about 35-40% due to an average favorable spread of 4.40% and a leverage…
The amplification mechanism relies on the scissors effect between accommodative US monetary policy (Fed rate cuts of -25 to -50 bps towards 2026) and a tightening by the Bank of Japan (+25 to +75 bps). This divergence, exacerbated by a 10x leverage for hedge funds, leads to a compression of the carry trade spread, making…
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