Markets and Interest Rates: TD Securities' Perspective on Currency Value Shifts

Unraveling Market Dynamics

The unwinding of the yen carry trade earlier this month spooked markets as investors sold off their positions, including in the US market, to cover their Japanese debt.

But from where we started a month ago to where we are now, the deleveraging of the yen has pretty much played out, says Jayati Bharadwaj, a global FX strategist at TD Securities. It may continue in the background, but an unwinding risk that could further trickle into the global market is much lower now, she said.

Staying Alert for Volatility

Still, currency traders should be on guard. Cooling global growth, continued geopolitical risks, and uncertainty around US election outcomes mean it could be a choppy ride for the next few months.

Also, it's still possible that other carry trades unwind, which happens when traders borrow in a currency with low interest rates to invest in a higher-rate one.

• Specifically, the Mexican peso could see a violent drop in value as the country takes on new leadership that could create uncertainty around central bank policies.
• Until now, peso investors have enjoyed interest rates ranging between 10.75% to 11%.

Economy and Currency Values

But carry unwinds are only one part of the story, and it's not where the real risk in FX markets is right now, says Bharadwaj. The next shoe to drop will be triggered by a slowdown of the global economy, which could reshuffle values in the currencies of the big global players, she noted.