Yen appreciation has carry-trade seekers looking at these two currencies

• Speculators flipped to net long positions on the yen in the week to Sept. 8, with around 10,800 contracts compared to 92,200 short positions the prior week, marking a significant sentiment shift
• The Chinese yuan is seen as a contender despite restricted capital account openness, with increased CNH bond issuance providing funding opportunities for multinational companies
• The Canadian dollar's carry-to-volatility ratio is already comparable to the yen, with TD Securities expecting further depreciation due to U.S. tariff impacts while the Bank of Canada holds rates at 2.25%

Summary: Yen Appreciation Drives Carry-Trade Currency Shift

The Japanese yen's recent strength has prompted investors to seek alternative currencies for carry-trade funding, with the Chinese yuan and Canadian dollar emerging as primary candidates.

Key Performance Metrics

The yen has appreciated approximately 6% against the U.S. dollar since late July, making it the best-performing G10 currency. Speculators have shifted positioning dramatically, moving from 92,200 net short contracts to 10,800 net long contracts in the week ending September 8, according to CFTC data.

Central Bank Policy Context

The Bank of Japan is expected to raise rates by 25 basis points to 1.25% at its upcoming two-day policy meeting starting Wednesday. Hawkish commentary from BOJ board members has signaled potential for accelerated rate hikes. Despite potential increases, Japanese rates remain low compared to global benchmarks: the U.S. federal funds rate stands at 3.50%-3.75%, the Bank of England at 3.75%, and the ECB at 2.5%.

Alternative Carry-Trade Currencies

Chinese Yuan: Bank of America identifies the offshore yuan (CNH) as a viable option, noting increased bond issuance activity and foreign corporate funding. China has maintained benchmark lending rates unchanged for 15 consecutive months (one-year at 3%, five-year at 3.5%).

Canadian Dollar: TD Securities highlights the Canadian dollar's comparable carry-to-volatility ratio to the yen. The Bank of Canada held rates steady at 2.25% this month, with potential for further depreciation due to U.S. tariff impacts on sentiment and production.

Market Implications

Analysts note this likely represents a rotation rather than an end to yen carry trades, as Japanese rates will remain low by global standards even after rate hikes.