CARRY TRADE UNWINDING PRESSURES HIGH-YIELD EMERGING-MARKET CURRENCIES

The rapid rise in the yen is ending a lucrative emerging-market trading strategy. According to Sina Finance, since Japanese authorities stepped in to support the yen at the end of July, a JPMorgan emerging-market currency index priced in yen has fallen more than 4%. This week, speculation that the Bank of Japan may raise rates further has prompted traders to unwind yen-funded carry trades, accelerating the decline. Brazilian real, South African rand, and Mexican peso all fell more than 1% against the yen on Thursday, and all three have turned lower since early September after posting year-to-date returns of 17%, 12%, and 9% as of August 31. The unwinding is also adding to foreign-exchange volatility more broadly. JPMorgan's index tracking one-month implied volatility for major emerging-market currencies versus the dollar rose this week to near a three-month high.