The big ‘carry trade’ unwind is far from over, strategists warn

It's too early to give the all-clear to the rapid unraveling of "carry trades," strategists have said, warning investors that the unwind may still have further room to run.

Carry trades refer to operations wherein an investor borrows in a currency with low interest rates, such as the Japanese yen, and reinvests the proceeds in higher-yielding assets elsewhere.

The foreign exchange strategy has been hugely popular in recent years, particularly as investors expected the Japanese yen to remain cheap and for Japanese interest rates to remain low.

However, the yen-funded carry trade began aggressively unwinding last week, as interest rate hikes by the Bank of Japan strengthened the yen — and led to a dramatic sell-off in global markets.

Richard Kelly, head of global strategy at TD Securities, said he'd be "very hesitant" to declare the end of the carry trade unwind, despite suggestions from some economists that the roll back may be largely complete.

"I'd push back on a lot of those narratives. You don't have any real data to price your carry trades that we know," Kelly told CNBC's "Squawk Box Europe" on Monday.

"I think there is still a lot that can unwind, especially if you look at how undervalued yen is. That is going to change the valuations for the next one to two years to come. That's going to have spillover effects."

Economists have said it is difficult to accurately assess the scale of the yen carry trade, with estimates varying widely. Some analysts, using Japan's foreign portfolio investments, say the yen carry trade could total as much as $4 trillion, Reuters reported.

Analysts at TS Lombard, however, said in a research note last week that investors may need to find up to $1.1 trillion to pay off yen carry trade-borrowing.

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