SINGAPORE, Sept 8 (Reuters) - A blistering rally in the Japanese yen ahead of an expected interest rate hike from the Bank of Japan next week is upending the long-established and lucrative carry trade, as investors rethink the path ahead for the volatile currency.
Early hints of capital repatriation and expectations of a faster pace of monetary tightening by the BOJ along with U.S. pressure are combining to boost the yen, which hit 40-year lows in July, triggering a joint U.S.-Japan intervention.
The spike is also spurring an unwinding of the popular carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher yields, as traders brace for central bank meetings in Japan and the U.S.
"The carry trade is vulnerable because this unwind is happening before the BOJ has even delivered its expected hike," said Charu Chanana, chief investment strategist at Saxo.
"Some yen shorts have already been cut, but positioning still looks sizeable, so further yen strength can turn a gradual reduction in leverage into a much faster, self-reinforcing unwind."