Markets
The Yen Carry Trade Is Unwinding Again — and This Time the BoJ Started It
Hawkish signals from the Bank of Japan sent the yen sharply higher against the dollar, forcing a fast unwind of one of the market's most crowded trades.
The Japanese yen strengthened sharply against the US dollar after Bank of Japan officials signaled openness to a further rate hike sooner than markets had priced in, breaking a multi-month stretch of relative calm in the currency.
The move matters beyond the currency pair itself because of how much leverage sits on the other side of it. The yen carry trade — borrowing cheaply in yen to fund higher-yielding positions elsewhere — has been one of the more crowded trades in global markets, and a sudden yen appreciation forces those positions to unwind quickly, which is exactly the mechanism behind past bouts of outsized, fast-moving volatility in equities far removed from Japan.
This time the early moves have been comparatively orderly, but the setup is the same one that has preceded sharper dislocations before: a policy surprise from a central bank most traders weren't focused on, hitting a trade that had grown large precisely because it seemed stable.
Currency moves tied to shifting rate-differential expectations tend to trend over days rather than resolve in a single session, which makes Spot Trading's real, zero-spread pricing a more natural way to follow the actual move than trying to call the exact turning point.