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Global stock markets suffered a "Black Monday", with more than $6 trillion in market value evaporating. The current market focus is on whether the "closeout of yen carry trades" that triggered this wave of selling has ended?

Wall Street analysts have different opinions on this. Goldman Sachs and Societe Generale believe that the unwinding of yen carry trades is nearing its "end."

Goldman Sachs' foreign exchange team's position score shows that the short positions in the Japanese yen have been basically liquidated, which indicates that the market is about to bottom out; Societe Generale's July CFTC position data also shows that most of the short positions in the Japanese yen have been closed.

JPMorgan Chase, UBS and Scotiabank hold a different view, saying the "pain" of closing carry trades is not over yet.

The investment bank generally believes that the current process of closing out yen carry trades has only been completed by about 50%, the yen is still one of the most undervalued currencies, and the closing of carry trades depends largely on the level of interest rate differentials.

Proponent: The closing of arbitrage trading is nearing its “end”

Goldman Sachs is optimistic that the pressure to close short yen positions has now been largely eliminated, meaning the pain from the carry trade is about to end:

Position Rating:Goldman Sachs FX team positioning score shows that short positions in the Japanese yen have been basically liquidated and the current positioning is slightly bullish, which indicates that the market may be close to bottoming.
Short Position:The latest data as of July 23 shows that yen short positions are at a historical high (about US$5 billion). Due to margin calls, these positions have accelerated the decline of USD/JPY. It is estimated that 60-80% of these positions have been liquidated.

In addition, Goldman Sachs is also optimistic about the Nikkei Index, believing that "from a fundamental perspective, the Nikkei Index is at a very attractive level."But Goldman Sachs remains cautious at the same time. Given the possibility of further liquidation and some uncertainties in the future macro environment (economic growth, US economy), the trend of USD/JPY may fall sharply.

Societe Generale also believes that the unwinding of the yen carry trade is nearing its “end.” Manish Kabra, a strategist at the bank, noted:

Weak U.S. inflation data and a hawkish Bank of Japan stance have driven a reversal in the dollar-yen carry trade, which is fueling risk aversion in the Nasdaq 100. While the yen is still far from fair value, July CFTC position data showed that most short yen positions have been closed.

Kit Juckes, a foreign exchange expert at Societe Generale, believes that arbitrage trading is not important. What is important is how the "Big Seven" of U.S. stocks will react:

The biggest threat to market stability is not the performance of the foreign exchange market, but the performance of the US stock market, especially the technology stocks, which have rebounded sharply, are overvalued, and Buffett's preference for cash has once again made headlines. If the market continues to fall, it will affect the US economy and the Federal Reserve.

Con: The “pain” of closing carry trades is not over yet

JPMorgan Chase continues to sound the alarm:

As the yen remains one of the most undervalued currencies, there is still room for further unwinding of recent carry trades, with speculative investors' carry trade unwinding only 50%-60% completed.

Arindam Sandilya, co-head of foreign exchange strategy at the bank, added that the technical damage to portfolios caused by the yen's sharp rise in the short term "is not easy to repair."

UBS macro strategist James Malcolm said in a note to clients on Tuesday:

Only about 50% of the carry trades have been closed. At its peak, the USD/JPY carry trade grew to at least $500 billion. In the past two or three weeks, about $200 billion of the carry trades have been closed.

Shaun Osborne of Scotiabank echoed that sentiment, noting that two indicators of carry trades, the Bloomberg G10 Carry Index and the GSAM FX Carry Index, have fallen by around 5%, only half the declines seen in the past three carry trade liquidations. Osborne said:

How much carry trades are unwound depends largely on the level of the spread, not on the change in the spread, and the current trend may lead to more unwinding than the carry trade unwinding in 1998.The adjustment of arbitrage positions has been very rapid in the past few weeks, but it may continue for some time.