The Bank for International Settlements has published a staff bulletin examining how currency carry trades affect monetary policy transmission to exchange rates. The research finds that tightening in funding currencies such as the Swiss franc and Japanese yen can trigger much larger appreciations when hedge funds and other leveraged investors are heavily short those currencies, because policy surprises force them to unwind leveraged positions. When carry trade activity is limited, the exchange rate response is much weaker, pointing to state-dependent transmission. The analysis uses non-commercial traders’ net positions in Chicago Mercantile Exchange currency futures as a proxy for carry trade activity and relates this to policy surprises around central bank announcements. During periods of high carry trade activity, a 25 basis point monetary policy surprise is associated with about a 4 percent move in the Swiss franc and almost a 10 percent move in the Japanese yen against the US dollar. The effect is driven by tightening rather than easing shocks. The results also show deleveraging in speculative positions after tightening shocks, with net short Swiss franc futures positions shrinking by more than 60 percent of open interest during carry trade periods. The bulletin concludes that exchange rate modelling and central bank monitoring may need to account more explicitly for the role of leveraged investors and non-bank financial intermediation. The views expressed are those of the authors and do not necessarily reflect those of the BIS or its member central banks.
Bank for International Settlements 2026-05-06
Bank for International Settlements bulletin finds carry trades amplify exchange rate responses to monetary tightening with 25 basis point shocks linked to 4 percent CHF and nearly 10 percent JPY moves
The Bank for International Settlements has published a staff bulletin finding that monetary policy transmission to exchange rates depends on currency carry trade activity. Using non-commercial positions in Chicago Mercantile Exchange currency futures, the study shows that a 25 basis point tightening surprise can move the Swiss franc by about 4 percent and the Japanese yen by almost 10 percent against the US dollar when carry trades are elevated, driven by leveraged position unwinds. The bulletin concludes that exchange rate modelling and central bank monitoring may need to account more explicitly for leveraged investors and non-bank financial intermediaries.