On Tuesday, the yen jumped to 152.89 per dollar - its strongest point since mid-February - as markets increased bets on the Bank of Japan raising interest rates and remained vigilant for potential additional official support for the currency. It has since eased off that level. Against that backdrop, Morgan Stanley's team led by James Lord argues EM carry positions can hold up "without an additional catalyst that raises broader volatility." The carry approach typically borrows in a low-yield currency and invests in higher-yielding assets.
The team sees bigger drivers than the yen's latest move: the overall level of currency volatility, the health of the global economy and stock markets, and whether individual emerging markets still offer strong fundamental stories. In their words, "Global growth, global stock market performance and the bottom-up trends of key EMs are more important for the performance of EM carry trades than movements in JPY." They add, "On this, we remain constructive." They also note, "We continue to recommend buying EM on dips with bottom-up fundamentals, decent carry and resilient global growth helping to keep investors engaged in the asset class."
Early read-throughs suggest resilience. Since July 29, Brazil's real is down 5.1% against the yen and Colombia's peso is lower by 3.4%, yet both gained versus the dollar by 0.7% and 2.4%, respectively. While the yen has long been a favored funding currency, investors have been spreading that role to the euro and the Swiss franc as they finance higher-yielding bets.
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The through-line here: Morgan Stanley thinks the fate of EM carry hinges more on growth, equities, and country-level fundamentals than on a single currency swing. If those pillars stay solid, a yen pop by itself is unlikely to be the thing that breaks the trade.
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