📝65%-75% Of Carry Positions Have Been Unwound: J.P. Morgan FX Strategy

The main FX casualty in the vol spike was FX carry, which will be hard-pressed to recover the dominant status it enjoyed throughout the last 12-18m. While this was an accelerated washout, it is broadly consistent with our long-held expectations that the prime window for carry trades had passed. Significant damage was done to the highly-profitable carry trade over the last two months - first via the MXN unwind post-elections, and more recently after the JPY rally (which had knock-on deleveraging effects that drove other funders like CHF & CNY higher). YTD carry returns have since been erased, and our various proxies for the broader carry trade positioning point to 65-75% of those positions having now been unwound. Importantly, it seems unlikely that traders will revert to trading FX carry in size, for several reasons. First, as we have long expressed, carry dispersion will continue to narrow - a process that would be amplified by the Fed’s new accelerated easing cycle (JPM 50bp cuts in Sept & Nov, see here) and EM central banks also accelerating their easing process (see here). Second, that narrower carry reward will have to contend with a higher vol base, upcoming US election risk and increased evidence that the broader economy is indeed slowing (US labor market, EU PMIs etc) suggesting that the global macro backdrop is now rather less conducive to the strategy’s pro-cyclical nature. The inverse is that valuation and rates-momentum strategies have recently outperformed. - J.P. Morgan FX Strategy