Despite coordinated US-Japan intervention weakening the appeal of yen-funded carry trades, one of the most popular forex strategies this year -- emerging market carry trades -- has shown considerable resilience.

Since Japan's direct intervention boosted the yen, the emerging market forex carry risk premium index has fallen by roughly 1%, matching the decline of similar G-10 currency benchmarks. This contrasts sharply with August 2024, when a sharp yen rally forced traders to repay yen funding, triggering global market turmoil and a 4% drop in the emerging market carry trade index.

The relatively mild market reaction has eased fears of a repeat of the 2024 carry trade crash, suggesting investors have gradually reduced their reliance on yen funding, turning instead to currencies like the euro and the Swiss franc to finance high-yielding emerging market asset bets.

Although the Brazilian real has fallen 4% against the yen since the intervention began, it has held roughly flat against the US dollar and slipped just 0.8% against the euro. Vontobel portfolio manager Thierry Larose commented, "The threshold for a disorderly unwinding of carry trades is now higher than it was a few weeks ago. I'm still doing carry trades, but I'm avoiding the yen."

Larose noted he is primarily using the dollar and euro to fund bullish emerging market positions while refraining from shorting the yen. He believes the Bank of Japan is "not yet ready to turn hawkish," but views the yen as undervalued with appreciation potential, diminishing its appeal as a funding currency.

For decades, near-zero interest rates in Japan made the yen the most popular funding currency for carry trades. While the Bank of Japan has raised its benchmark rate to 1%, it remains the lowest among the G-7 nations. However, the central bank has signaled a potential rate hike in September.

Energy price shocks from the Iran conflict have intensified inflation pressures in Japan, a major oil importer, exacerbated by the yen's weakness. In European trading Wednesday, the yen hovered around 158 per dollar, after touching about 164 last week -- its lowest since 1986 -- prompting US-Japan intervention to support the currency.

The euro also presents an attractive funding option, with the eurozone's benchmark rate at 2.25%, below the Fed's 3.5%-3.75% federal funds rate target. Meanwhile, Wells Fargo is shorting the low-yielding Swiss franc and going long the yen, betting that despite the slow pace of Japan's monetary normalization, yen yields will remain above the Swiss franc's ultra-low levels.

Steven Barrow, head of G-10 strategy at Standard Bank, wrote in a report, "Can this strategy continue to outperform? We see no reason why not. The trade has proven quite resilient, even in the face of potential headwinds."