Yen strength pushes carry-trade investors toward CNH and Canada

The Japanese yen’s recent rebound is changing the way some investors think about funding currencies. As the yen strengthens, the cost of borrowing it for carry trades rises, making it a less convenient source of cheap financing for bets on higher-yielding assets. That shift has prompted attention to other currencies that may serve the same purpose.

Yen rally reshapes funding trade

The yen has been the best-performing G10 currency and has gained about 6% against the dollar since late July, when Japanese authorities stepped into the foreign-exchange market. Speculators also moved sharply in the currency’s favor in the week to Sept. 8, flipping to a net long position after being heavily short the week before. The move has been reinforced by more hawkish remarks from Bank of Japan board members, who have left open the possibility of faster rate increases.

A stronger yen matters because carry trades rely on borrowing in low-yielding currencies and investing in higher-yielding ones. When the funding currency appreciates, those positions become more expensive to hold and more vulnerable to losses. Treasury Secretary Scott Bessent has also continued warning against betting on yen weakness, adding pressure on traders who had positioned for a weaker Japanese currency.

China and Canada come into focus

With the yen less appealing, some market participants are looking at the currencies of China and Canada as possible substitutes for carry-trade funding. Claudio Piron, head of Asia forex and rates, said China’s capital account is still much more restricted than Japan’s, but noted that offshore yuan bond issuance has increased and that multinational companies have been raising funds in those markets. That makes the offshore yuan, or CNH, part of the conversation even if it does not offer the same flexibility as the yen.

China has kept its benchmark lending rates unchanged for 15 straight months, leaving the one-year loan prime rate at 3% and the five-year rate at 3.5%. The offshore yuan trades more freely than the onshore currency, but it remains closely managed. That limits its use as a pure funding tool, yet continued issuance in CNH suggests it is gaining attention among borrowers and investors.

The Canadian dollar is also being watched as a possible replacement because it is used in global funding strategies and trades differently from Asia-linked currencies. For now, the key market change is not that one currency has definitively taken the yen’s place, but that the yen’s rally has forced carry-trade investors to broaden their search. That could alter funding flows across foreign-exchange markets if the yen remains firmer and policy signals in Japan stay hawkish.

This article is not investment advice and recommends no asset, level or direction; a single session's move is not evidence of a trend. For background see Stocks, Bear Market, BIST 100, and for terms the finance glossary.