Investing.com – Most of the quick-money brief positions in the yen have likely been fully liquidated by now, which should limit future volatility, UBS said.

The expiration of the yen carry trade has been a significant factor behind much of the market’s recent volatility, as the Bank of Japan’s decision to raise interest rates last week and expectations of cuts by the Federal Reserve caused many traders to reassess long-held positions.

Global carry trading is when investors borrow money from places where interest rates are low and then invest it in assets that generate higher returns.

For years, this has largely involved the Japanese yen, which has kept interest rates near zero in an attempt to stimulate a stagnant economy.

UBS analysts said in an Aug. 7 note that a key area of ​​focus for markets is assessing the size of the global yen carry trade and how much is still at risk of unwinding.

“We classify yen carry into three categories: ‘fast money’, ‘semi-fast’ money and ‘sticky money’,” UBS said. “We believe that fast yen short positions have likely been fully liquidated. In our view, the unwinding from the latter two groups should be gradual rather than disorderly.”

“Our forecasts for September 2024, December 2024, March 2025 and June 2025 are currently 147, 147, 143 and 140 yen, respectively,” UBS said.

“Given the recent bounce in USD/JPY, investors should consider selling the pair on gains above 147 yen, given our longer-term bearish outlook.”

At 06:10 ET (10:10 GMT), USD/JPY was down 0.4% at ¥146.10, having fallen sharply from a seven-month low of ¥141.67 earlier in the week.