According to CNBC, the Japanese yen's recent gains are prompting investors to look at the Chinese yuan and Canadian dollar as possible alternatives for carry-trade funding. The yen, the best-performing G10 currency, has risen about 6% against the dollar since late July, when authorities intervened in currency markets, and speculators turned net long on the currency in the week to Sept. 8, according to Commodity Futures Trading Commission data.
Hawkish comments from Bank of Japan board members, which left open the possibility of faster rate increases, have helped support the yen, while Treasury Secretary Scott Bessent has continued warning speculators against betting on further weakness. Bank of America said the Chinese yuan is being considered as a contender, and Claudio Piron, head of Asia forex and rates, said China is becoming more like Japan on deflation while Japan is becoming more like China. He added that China's capital account remains far more restricted than Japan's, but offshore CNH bond issuance has increased and foreign multinational companies are seeking funding in those markets.
China left benchmark lending rates unchanged last month for the 15th straight month, with the one-year loan prime rate at 3% and the five-year rate at 3.5%. TD Securities said the Canadian dollar could become a more attractive funding currency than the yen, noting that its carry-to-volatility ratio is already comparable to the Japanese currency. The Bank of Canada held its policy rate at 2.25% earlier this month, and OCBC's Chris Wong said some rotation away from the yen is possible, though Japanese rates would still be low even after another BOJ hike.