I have previously shown the Mexican peso holding the largest beta to the Japanese yen in the EM space. This is due to the popularity of the carry trade, which I have explained before in previous posts. Low rates in Japan and an attractive yield/vol ratio in MXN push traders into JPY funded long peso trades
The chart below shows a measure to estimate the size of the carry trade, Japanese banks' foreign lending. The last reading available is for June 2024, when loans outstanding reached a record high of JPY2.7 trillion. These figures are likely to reverse as the BoJ hiked rates for the second time this year in July
The red line is the MXN/JPY rate, which has moved in line with Japanese bank's foreign lending over this cycle. A steady increase in foreign lending saw outstanding loans jump 70% from this time in 2020, the MXN/JPY rallied 81% over this period of time
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