On August 7th, Caixin reported that the Nikkei 225 index rose further shortly after the opening, with a morning rise of more than 3%. At the same time, in the forex market, the US dollar against the Japanese yen also strengthened further, rising to a high of 147.50 at one point during the day…

Currently, a major focus of the Japanese financial market revolves around whether the 'Great Clean-Up' of arbitrage trading is coming to an end.

If the 'Great Liquidation' is over, the previous violent decline of Japanese stocks may come to an end, and the extreme surge of the yen's exchange rate may also ease. However, if the 'Great Liquidation' continues, the market's anomalous situation is likely to have a second half full of uncertainty...

However, some Wall Street institutions, including Nomura, are still rather pessimistic. We have previously reported that Arindam Sandilya, co-head of global foreign exchange strategy at JPMorgan, said that the 'yen carry trade liquidation' that caused the recent stock market plunge may not be over yet.

"We believe that at least in the speculative investment sector, the unwinding of carry trades may have been completed by 50% to 60%." Sandilya said in an interview with the media on Tuesday. He also said that the Bank of Japan may continue to slowly raise interest rates, as the country's borrowing costs have "a long way to go" to match the real economy.

However, Goldman Sachs seems to have a different view currently.

Goldman Sachs: The 'Great Liquidation' of arbitrage trading is coming to an end

Anton Tran, a trader at Goldman Sachs, stated in a latest report released on Tuesday that the pressure from short yen positions has basically been eliminated, which means that the 'pain of arbitrage trading' is coming to an end.

The following are Goldman Sachs' latest views on arbitrage trading positions from five dimensions:

Position score: Goldman Sachs's foreign exchange team's position score shows that short yen positions have been basically liquidated, and current positions are slightly biased towards long positions, which suggests that the market may be close to the bottom.

Retail positions: Data as of July 23 showed that short yen positions hit a historical high, with a leverage scale of approximately $5 billion. Goldman Sachs believes that it is these positions (ending) that accelerated the decline of the US dollar against the yen, because they would involve additional margin calls; however, the bank's foreign exchange sales counter believes that 60%-80% of the positions had already been liquidated by the previous decline.

Japanese life insurance companies: The bank believes that Japanese life insurance companies will not see capital outflows because they find it difficult to tactically increase their hedge ratios.

Traders: Gamma short positions held by traders due to Japanese insurance companies buying put options are another factor that led to the decline of the US dollar against the yen, especially around 142-147.

Retirement fund: Goldman Sachs estimates that retirement funds need to implement US dollar purchases, selling yen transactions worth $12 billion to rebalance, which will further ease the trend of the US dollar against the yen falling.

Undoubtedly, compared with other Wall Street institutions such as Nomura, Goldman Sachs has a more optimistic timetable for the closure of the arbitrage trading positions, and the bank is more bullish on various downstream assets affected, such as the Nikkei index.

Goldman Sachs' trading counter believes that the current fundamentals make the Nikkei index 'very attractive'. Although the bank's research and strategy team is still cautious, believing that the short-term prospects are still uncertain and may face further liquidation, and it is expected that the future macro-environment (economic growth, yen exchange rate, US economy, etc.) will have some uncertainties.

Of course, Goldman Sachs also mentioned the biggest problem that Japanese assets face currently: who will be able to buy Japanese assets in the future? Overseas investors have already suffered losses, and retail investors also find it difficult to make ends meet. Can more buyers who take over the properties come up in Japan?

Editor/Emily