Newsletter · 2026-09-08 · Ashutosh Agarwal

The Carry Trade Swapped Yen Funding for Dollars as the Yen Turned - EM FX - Week of September 8, 2026

EM FX for the week of September 8, 2026. Podcast synthesis on why the yen's best run since February did not kill the emerging-market carry trade, Marc Chandler's case that traders simply shifted the funding leg from yen to dollars while the Mexican peso hit multi-year highs, J.P. Morgan's yen trade expression, and the strong August jobs report that put a September Federal Reserve hike back near a coin flip.

EM FX

Week of September 8, 2026: The Carry Trade Swapped Yen Funding for Dollars as the Yen Turned

For a year, the emerging-market carry trade (borrow something cheap, park the money in something that pays a fat yield) had one dependable engine: the Japanese yen. Yen borrowing costs were near zero, so it was the world's cheapest way to fund a bet on a high-yielding peso, real or rand. This week, that engine started to sputter. The yen just had its best run since February, and the market is now convinced Japan will raise interest rates on September 18.

Here's the twist, and it's the most interesting thing anyone said on the podcasts this week: the carry trade didn't die when the yen turned. It quietly changed fuel. Marc Chandler, the veteran currency strategist who was also last week's standout voice, put it plainly: traders "didn't really get out of" their high-yield emerging-market bets. They just stopped funding them with yen and started funding them with dollars. Same trade, new cheap fuel. The peso, he noted, actually hit fresh multi-year highs this week.

So the story isn't "the carry trade is unwinding." It's "the carry trade is being re-plumbed," and that matters, because the new plumbing runs straight through the two things everyone's watching: a wobbling dollar and a September Federal Reserve meeting that's now a genuine coin flip. Last week's cliffhanger, would a hot jobs report revive the rate-hike scare, got its answer on Friday. The jobs number came in strong, the hike scare came back, and gold got hammered. But the dollar still couldn't rally, and the yen ran anyway. That tension is this week's whole story.

TL;DR

The yen turned hard. It rose more than 2% on the week to its strongest since February, as the market moved to fully price a Bank of Japan rate hike on September 18. Because the yen is the classic funding currency for carry trades, a turning yen makes the whole emerging-market carry basket a little more expensive and a little riskier to run.
But the carry trade isn't unwinding, it's switching fuel. Marc Chandler's key insight: investors kept their high-yield longs (the Mexican peso hit new multi-year highs this week; the Colombian peso is strong) and simply shifted the funding leg "from yen towards the dollar." The trade lives; only the cheap-money source changed.
The jobs report broke the hawks' way. August payrolls came in around 160,000 versus about 55,000 expected, with prior months revised up. Odds of a September Fed hike sit near 60%. Gold got slammed, down roughly $90 on the day, briefly touching $4,000 before clawing back above $4,400.
It's still a coin flip into two dates. Fed dove Christopher Waller said he's ready to hold in September if this Friday's (Sept 11) inflation report shows prices still cooling. So: CPI on Friday, then the Fed decision September 16. A 0.3%-or-higher monthly reading likely means a hike; a 0.2% reading likely means a hold.
Treasury Secretary Bessent, on the record: he hasn't actually bought a single bond yet under his new buyback plan ("September 9th"), insists he "can't change the equilibrium price," and says he and Fed Chair Kevin Warsh are "on the same page." He also all but predicted the yen would strengthen.
The politics got louder. President Trump threatened on social media to halt trade with every country the US runs a deficit with unless the Fed cuts, a striking twist given a hike is what's on the table. A rate decision six weeks before the midterms is now a political event, not just an economic one.
Oil is back near $100 on renewed US-Iran fighting around the Strait of Hormuz, keeping a floor under inflation everywhere and complicating every central bank's job. Copper is near highs, a quiet tailwind for the commodity-linked currencies.

What's new

The single most useful reframe of the week: the carry trade re-funded rather than unwound.

On The KE Report (Sep 4), Marc Chandler, Chief Market Strategist at Bannockburn Capital Markets, was asked whether a rate-hiking Japan changes the yen's role as the world's funding currency. His answer cut against the panicky "carry unwind" headlines:

People say we're short yen, long say Latin American currencies. What did they do? They got out of the yen, but did they really get out of Latin American currencies? I don't think so... The Mexican peso is at new multi-year highs today. Colombian peso is also very strong... rather than get out of the carry trade so much, what people did was just shift the funding leg from yen to the dollar.

Think of these funding currencies, he said, as "cash registers for large pools of capital," you borrow cheaply in yen, or Swiss francs, or dollars, and buy something higher-yielding. This week the cash register changed, but the purchase didn't. For an emerging-market book, that's the whole point: the high-yield longs (peso, and to a degree the real and rand) are still on. What moved is how they're financed.

Chandler is also skeptical the yen's turn will stick, and he made the case with a neat real-world example. Earlier in the week New Zealand's central bank raised rates and signaled more to come, and the New Zealand dollar fell nearly 0.8% anyway. His point: a widely expected 25-basis-point hike, already priced in, rarely moves a currency much. He thinks the same will be true for Japan, because dollar-yen tracks US interest rates far more tightly than Japanese ones. "I can demonstrate quantitatively," he said, "the correlation is higher with US interest rates than Japanese rates."

His bigger currency call: the dollar is simply overvalued and stuck there until America gets "its house in order," lower oil, a smaller budget deficit, falling yields. "The euro and most of the G10 currencies are terribly undervalued against the dollar," he said (the euro sat just above 116). When yields finally fall, "the dollar will track them," and that will relieve the pressure on "several countries in East Asia" with weak currencies. In other words: the soft-dollar tailwind that powers EM carry is paused, not cancelled. He also flagged a striking mechanical point: since the war with Iran began, market expectations for the Fed's overnight rate have risen about 100 basis points, and the 10-year yield has risen about the same. To Chandler, that one fact explains most of this year's bond sell-off, no debt-doom narrative required.

The professional FX desks confirm the yen turn, and tell you how to trade it.

The clearest institutional read came from J.P. Morgan's own FX strategists on At Any Rate (Sep 4), hosted by co-head of FX strategy Meera Chandran. Two fresh pieces of news, they said, turned them tactically friendlier on the yen:

The Bank of Japan is now fully priced to hike in September, and there's live chatter about a bigger 50-basis-point move after board member Takada declined to rule it out in a September 2 speech. JPM's base case is that Japan hikes in steady, consecutive steps, roughly once a quarter, rather than shocking the market with 50 at once (they remember the volatility that a surprise hike caused in July 2024).
Japan's giant government pension fund (GPIF) may be shifting money home. Its management committee held a rare August meeting, the first in August since 2019, and revisited a portfolio review it had closed only months earlier. JPM's math: simply moving to the top of its existing allocation ranges would imply roughly 33.8 trillion yen (about $217 billion) of yen-buying and foreign-currency-selling, bigger than all of Japan's official currency intervention so far this year (27.2 trillion yen, about $174 billion). The next clue is Japan's monthly flow data, due September 8.

Crucially, JPM said the yen's relationship to rate-hike expectations has "normalized," meaning rising hike bets now translate directly into a stronger yen. And with short-yen positions still near a three-decade extreme, "any of these catalysts could trigger significant short covering" and an outsized yen jump. Their trade expression is worth noting for a carry book: rather than bet on the yen against the dollar (where the Fed muddies the picture), they prefer a constructive yen view against other low-yielders like the Swedish krona or Swiss franc, to "keep the dollar out of the equation." Their base range for dollar-yen: 155 to 165.

The morning-desk color matched. On NAB Morning Call (Sep 3), NAB's Rodrigo Catril described the yen as "a very notable outperformer... up over 2%" on the week, back near the 155 handle after flirting with 160 just days earlier, with the move powered by dovish comments from Fed officials Waller and Williams and solid Japanese data. A few days later, on NAB Morning Call (Sep 7), NAB's Gavin Friend said the market had "crossed the rubicon," investors now believe Japan will finally "play catch-up" and deliver several hikes, leaving the yen looking "undervalued." His logic on why Japan won't back down is pure geopolitics: the US Treasury has handed Japan a facility to intervene without selling US bonds, and "you would cross Scott Besson and Donald Trump... at your peril."

Chandler's counter-punch: 155 is a floor, not a launchpad. For all the yen enthusiasm, Chandler put concrete levels on it. The 155 area, he noted, has now held on three separate occasions this year, in April/May, in late July/early August, and again this week (the low was about 155.30). He reads that as a floor forged by big funds covering short-yen bets, not a new trend. His guess: the yen could actually weaken back toward 157–157.25 before intervention fears flare again, with 160 the line nobody wants to cross. Translation for carry traders: don't assume the funding squeeze runs away from here.

The jobs report that broke the tie, and slammed gold.

Last week the entire debate hung on one question: would the jobs report come in hot enough to justify a Fed hike? It did. On The Tom Sullivan Show (Sep 4), the August payrolls print was pegged at about 162,000, well above the roughly 55,000 expected, with the unemployment rate steady at 4.1%. The panel of named economists split exactly along the week's fault line:

Jeremy Siegel (Wharton) called it "a very good jobs report and a non-inflationary jobs report," arguing the gain was a supply response (more people entering the workforce) with "wages completely under control." His kicker: "If the midterm elections were not on the horizon, the Fed would raise rates."
Diane Swonk (KPMG chief economist) was the hawk: after a call with more than 50 industry economists, she said "the debate was not on whether the Fed should hike. It was on how high," warning of "a lot of inflation in the pipeline" and a return of "muscle memory for inflation."
Roger Ferguson (former Fed vice chair) landed in the middle: a "stable labor market" at full employment, which "takes one of the question marks off the table," and a hike is "more likely than not."

The market barely flinched in a straight line: on RiskReversal Pod (Sep 7), Guy Adami noted the jobs beat (about 160,000 versus 55,000 expected, prior two months revised up by more than 50,000) yet the odds of a September hike on the CME FedWatch tool actually ticked down to about 60.5%, with the 10-year yield at 4.77%. His read on why: the President keeps publicly demanding lower rates, and that political pressure "carries a pretty big stick." Adami's own call is to "stay the course," no reason to hike or cut, and he floated a genuinely counterintuitive idea making the rounds: a Fed hike might actually calm the long end of the bond market by reassuring investors there are "adults in the room."

Gold told the other side of the story. On The Peter Schiff Show (Sep 6, a metals-focused show, treat the price targets as opinion), gold fell roughly $90 on the strong jobs number, briefly hitting $4,000 before recovering above $4,400, with silver around $66. That whipsaw matters well beyond the gold pits, because gold is the single biggest driver of the South African rand.

The one voice you can't get anywhere else: Bessent himself.

Treasury Secretary Scott Bessent sat for a remarkably candid interview from the G20 on Squawk on the Street (Aug 31), and it's the closest thing to primary-source insight this week. Three things stood out for anyone trading the dollar:

His famous bond buyback hasn't started. "By the way," he said, "I haven't bought anything yet... September 9th." The market reaction so far, he argued, came purely from the signal.
He disowns the idea that he's fighting the bond market. "I don't believe that I can change the equilibrium price," he said. "My job is to make sure the market is looking at fundamentals and that the market does not dictate policy." On his old mentor Stanley Druckenmiller's public criticism, he was cutting: "Stan's a great investor. He changes his mind a lot. And he doesn't like losing money. I think he lost money the day he sent in the editorial."
He effectively pre-announced a stronger yen. Asked about Japan, he said, "I have information that the market doesn't have... it's my belief that the Japanese government and the BOJ will do the things that will lead to a stronger yen," adding that the market is "pricing that in now." That's the US Treasury openly nudging Japan to hike, and it's exactly the pressure the FX desks cited as the reason the yen turned.

He also said he and Warsh are "on the same page," and defended not wanting to hike into a supply shock: "traditionally, you don't raise until a supply shock unless you see second or third order effects." A Treasury Secretary talking down the case for hikes while his boss demands cuts is its own signal about how political this Fed meeting has become.

The politics moved from subtext to text. On the same day as the jobs report, President Trump posted (in all caps) that he would "stop trading with countries with which we have a deficit" unless the Fed cut rates, adding that "the Fed board with its great new leader must get smart. Be patriots for a change" (via The Tom Sullivan Show, Sep 4). As CNBC's Steve Leisman pointed out on air, the threat is self-defeating: the countries America runs deficits with are the ones that recycle their dollars into US Treasuries, which lowers rates. But the direction of travel is clear: a rate decision six weeks before the midterms is now a live political fight, and that uncertainty is precisely the kind of thing that can cap the dollar even when the economy looks strong.

The debate

This week the podcasts gave both sides real ammunition, and the fault line runs right through the carry trade.

Bull case (the soft-dollar carry trade is paused, not over). Chandler carries this flag: the dollar is overvalued and will fall once yields and oil roll over; the high-yield longs are still on (the peso at multi-year highs is the proof); and the yen's turn doesn't kill the carry trade, it just re-routes the funding to the dollar. Add a dovish Fed escape hatch: Waller has explicitly said he'll hold in September if inflation keeps cooling. And Guy Adami's "stay the course," no hike, no cut, is the quiet base case that lets a crowded carry book keep clipping its coupon. If the dollar can't rally on a strong jobs report and near-60% hike odds, as it couldn't this week, that tells you how heavy it is.

Bear case (the funding squeeze plus a hike cleans it out). The strong jobs report put a September hike back on the table (roughly 60% odds), and a hiking Fed widens the rate gap against crowded EM longs while keeping the dollar bid. Worse for carry specifically, the cheapest leg of the trade is turning: a Bank of Japan hike on September 18, short-yen positioning at a three-decade extreme, and a pension fund that may pull tens of billions of dollars home. J.P. Morgan warned that any of those catalysts could trigger "significant short covering" and an outsized yen jump, the classic way a crowded carry trade gets violently unwound. Layer on Trump's trade-war threat and an oil price back near $100, and you have exactly the cocktail of election noise, funding stress and inflation risk that flushes a one-directional trade. The hawks are loud and credentialed: on Odd Lots (Sep 1), Adam Posen flatly said "the Fed is going to hike" in September or December and sees policy rates 75–100 basis points higher within six months; on The Exchange (Sep 1), Barry Knapp put September hike odds at 65–75%, arguing Warsh has "painted himself into a corner" on credibility.

The honest read: both sides now wait on the same two dates, Friday's inflation report (Sept 11) and the Fed decision (Sept 16). A cool CPI hands it to the bulls (dollar rolls back over, carry keeps running); a hot one, especially with a hike, hands it to the bears. Everything else is noise until those print.

The trades in play

This was not a conceptual week, the desks gave concrete expressions:

The yen, played against the right partner. J.P. Morgan's tactical preference is a constructive yen view against low-yielders like the Swedish krona or Swiss franc, deliberately keeping the dollar out of it, because the Fed decision clouds dollar-yen. Their base range for dollar-yen is 155–165. For a carry book, this is really a hedge: if the funding squeeze accelerates, you want to be long the currency doing the squeezing against something equally sleepy, not against the dollar.
Don't assume the yen runs away. Chandler's level discipline is the counter-trade: 155 has held three times this year and looks like a floor, and he'd expect a bounce back toward 157–157.25 before intervention fears return. If he's right, the funding-cost scare for carry is milder than the headlines suggest.
The high-yield longs are still the trade, just funded differently. The peso making fresh multi-year highs (Chandler) says the market hasn't abandoned carry; it re-funded it via the dollar and Swiss franc. The read: don't panic-cut EM longs into the yen's move.
Two dates decide it, not two levels. Friday's CPI (a 0.2% monthly handle = hold-friendly and dollar-negative per Waller; 0.3%+ = hike-friendly and dollar-positive), then the September 16 Fed meeting.
Gold is the rand's tell. Gold's ~$90 slam on the strong jobs number, briefly to $4,000, back above $4,400, is the live headwind to the cleanest EM long. Watch it as a real-time rand proxy.

Read-throughs

Broad dollar, heavy despite the good news. The tell of the week: a strong jobs report and ~60% hike odds, and the dollar still couldn't rally (it fell 0.7% on Friday and stayed offered into this week). Chandler's frame (overvalued, waiting on lower yields and oil) and the fact that global investors keep buying US assets but refuse to hold the dollar unhedged, both point to a currency that "finds it easier to sell off than rally." That's the soft-dollar backdrop EM carry needs, still intact under the surface.
Mexican peso (EWW) and the LatAm complex. The genuine positive surprise: the peso hit new multi-year highs and the Colombian peso is strong (Chandler), carry longs are working, not unwinding. Brazil's real stays a special case, liked structurally but hostage to election headline risk over the next month.
Rand (EZA) and gold. The rand's fortunes ride on gold, and gold took a hit on the jobs report (down ~$90, a dip to $4,000, a bounce to $4,400+). Copper near highs is a modest offset for the broader commodity-currency complex. Net: the rand's commodity support is intact but newly two-sided, with gold volatility the swing factor.
AUD as a China/commodity proxy. The Australian dollar firmed to about 72.2 US cents, its best in a while, with copper near highs (NAB Morning Call, Sep 7), a quiet vote of confidence in the reflation/commodity trade that tends to travel with EM risk appetite.
Euro and CE3. Chandler expects the European Central Bank to hike 25 basis points this Thursday, with more to come, and calls the euro (around 116) "terribly undervalued." A firmer euro and a hiking ECB are the coattails Poland, Hungary and the Czech Republic ride, supportive, at the margin, for Central European currencies even when they're not in the headlines.
Global bonds (EMB, local debt). The through-line under everything: the US 10-year near 4.8%, a multi-year high, dragged up in lockstep with oil and Fed-hike expectations (Chandler's ~100bp-since-Iran point). Higher core US yields keep compressing the relative appeal of EM local debt even when the headline carry looks juicy: the crowding question that's dogged this trade all year hasn't gone away.
Oil, the inflation tax that keeps central banks hawkish. Brent pushed back toward $100 (over $98 intraday) on renewed US-Iran fighting near the Strait of Hormuz, with product markets even tighter, diesel and gasoline cracks at multi-year highs and US diesel around $5.78 a gallon. High energy prices keep a floor under inflation globally, which keeps the hawks (and the dollar bulls) in business.

What changed

The concrete shift from last week is that the cliffhanger resolved, and a new one opened.

Seven days ago, the whole argument hung on a jobs report and a CPI print. The jobs report has now landed, and it was strong (about 160,000 versus 55,000 expected). That reignited the September-hike trade and slammed gold. Score one for the bears, except the dollar still couldn't rally and the yen ran anyway, which is the tell that this isn't a clean hawkish win.

Two things genuinely moved this week:

The yen turned, and with it the mechanics of the carry trade. Last week the yen-hike story was a forecast (the funding leg would rotate). This week it's happening: a BOJ hike on September 18 is fully priced, the yen is at a five-month high, short-yen bets are unwinding, and Japan's pension giant may be repatriating capital. The important nuance, Chandler's, is that the carry trade responded by re-funding from yen to dollar, not by dying. The trade mutated again.
A named emerging-market currency finally showed up on the pods, as a winner. After weeks where the peso, real and rand were reachable only through cross-market desk voices, Chandler this week pointed to the Mexican peso at fresh multi-year highs and a strong Colombian peso as living proof the carry longs are intact. That's a small but real change from the recent run of dollar-and-rates-only issues.

The trade that runs on cheap funding and a soft dollar spent this week getting re-plumbed, not dismantled. Whether the new plumbing holds depends, once again, on numbers we'll have within days.