What’s going on here?
The Indian rupee hit a new low of 83.8450 against the US dollar on August 5, 2024, as carry trades fell apart amidst heightened market volatility.
What does this mean?
The rupee’s nosedive makes it the worst-performing Asian currency this year, a sharp turn from its strong start in 2024. While Asian currencies generally rose in July, the rupee dropped by 0.4%. Investors have been unwinding carry trades that once favored the rupee over the yuan due to higher yields and lower volatility. The yuan’s rally and higher market volatility have flipped the script, with the offshore yuan’s 1-month realized volatility soaring from about 1% in early July to over 5%. The rapid unwinding of carry trades worldwide, sparked by the yen’s surge following the Bank of Japan’s hawkish rate hike, has taken a toll on high-yielding currencies like the rupee.
Why should I care?
For markets: Rupee’s fall shakes market confidence.
Investors have seen significant shifts in Asian currency markets, with the rupee’s decline bucking the broader trend of gains in currencies like the Malaysian ringgit and the offshore Chinese yuan. The rapid unwinding of carry trades has impacted not only the rupee but also global markets, influencing US tech stocks and the Mexican peso.
The bigger picture: Global volatility spikes amidst yen’s rise.
The unexpected rate hike by the Bank of Japan, which prompted a 6.5% rally in the yen against the US dollar, has disrupted global carry trades. This has led to increased market volatility, affecting high-yielding currencies worldwide and signaling broader implications for future market liquidity and investment strategies.
