When markets get all one way, over leveraged and participants drinking the same cool aid any quiver against the grain can quickly become a shake. Essentially the carry trade is funding an investment from a cheaper source, in this case the Yen with negative interest rates and buying an asset with positive returns. The deeper and longer the carry trade goes on the natural motives of risk and greed entwine and when it goes wrong is amplified in low liquidity markets.
On the first Monday of August, the reliable and highly popular carry trade involving borrowed yen to buy risky securities collapsed suddenly, driven by a small policy shift from the Bank of Japan which fueled a global market meltdown in its wake. Prior to this the BOJ had intervened buying dollars. Japan said it stepped into the foreign exchange market twice in the quarter with Ministry of Finance intervening on July 11 and 12, spending ¥3.17 trillion ($20.7bn) and ¥2.37 trillion respectively to prop up the yen.
The market was even more one way as a result and from there a disorderly yen rally (7% in four sessions) which triggered “yen carry trade” unwind fear and margin panic. USDJPY had broken higher after weakness with Treasury yields to rush over 160, a long way from that 108.00 massive support for dollar-yen.
On August 5th, 2024, we saw swift instability after an intense bout of de-risking and deleveraging at the cusp of erupting. Investors rushed to exit positions in everything from Australian bonds and US mega-cap stocks to Bitcoin, fearing a breakdown in the leverage cycle amid uncertainties over the monetary and economic outlook. The selling was in illiquid markets with the U.S. asleep. Think of it as a shot across the bow, a harbinger of “risk off” de-leveraging hastily patched by the BOJ. Markets had become increasing aggressive in testing the Bank of Japan and selling yen, buying dollars.
At intraday lows,
- Nikkei 225 fell 12%
- South Korean Kospi Index fell 9%.
- Nasdaq100 and KBW Bank Index were down at least 5%,
- Bitcoin had intraday losses of almost 14%.
- The VIX index spiked 42 points to an intraday high of 65.73, with the highest close (38.57) since October 2020.
Bank of Japan Deputy Governor Shinichi Uchida, responded to stabilize markets. He said “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being… There is extreme volatility taking place in financial markets, so we need to be more cautious…”
Among the biggest losers were emerging market carry trades funded by the yen, with most of the strategy’s gains for the year wiped out as investors unwound a whopping 75% of their investments. Then it seems by the next day the great market crash of 2024 ended almost as soon as it began, and risk appetite returned with a vengeance across assets.
Yen weakness is providing key support to dollar melt-up dynamics with BOJ slow-motion “normalization” in a world of fast-moving dynamics. The dollar yen has traded 160.17 this cycle, the first time above 160 since April 1990.
Japanese Prime Minister Shigeru Ishiba on his first day in office said the economy was far from ready for fresh monetary tightening. In turn, a basket of emerging-market currencies funded by the yen was now up for the year 13% this year heading into year end. This despite the volatility with the Japanese Yen
Governor Kazuo Ueda on that move basically ceded the yen fragility issue to the Ministry of Finance (MOF), who affirmed that Friday it wasn’t in the BOJ’s purview. He conveyed little concern for yen weakness, while downplaying its inflationary impact. The market accordingly took the yen out to the woodshed.
In Jackson Hole a couple weeks later, dovish Chair Powell delivered the news markets had clamored for: “The time has come for policy to adjust. The direction of travel is clear…”
Basis and Carry Trade Sustainable?
DeepSeek Swoon: We had a reminder of risk with the NASDAQ Swoon Monday 27, 2025, NVDA was down 17% in biggest market cap loss in history. This was the result over the weekend where nothing was expected out of China with Luna New Year. The culprit a Chinese AI app DeepSeek was released for free Sunday night). Interesting NVDA technically has been priced to perfection (see the KnovaWave NVDA weekly updates), timing of the catalyst is the big unknown nearly always as was the case here.)
Was DeepSeek the beginning of the end of the AI Speculative Bubble?
Don’t forget your trading rules, especially as liquidity falls
There is a reason we have strict trading rules here based on psychology, math, experience and avoiding false narratives and dribble out there. That said pay attention to the time of year, the bonus pay dates (no we aren’t being cynical), tax markings and look the previous run ups into Dec 31. Don’t let the grifters out their sway you, VIX is historically low, what does that tell you? Protection is cheap and the market is complacent with no fear. Here endeth the lesson.
How quickly investors forget when FOMO rules. By year end the punters appeared all in. A week prior to the final FOMC of 2024 Money Market Fund Assets (MMFA) expanded the largest since the March 2023 banking crisis, the week ended March 15th. The MMFA surged $95.9 billion to a record $6.771 TN. MMFA were up $637 billion, or 30% annualized, over the past 18 weeks, with y-t-d growth of $885 billion, or 15.9% annualized.
We have seen a spectacular monetary inflation, MMFA inflated $2.212 TN, or 49%, since the Fed commenced “tightening” in March 2022, and $3.137 TN, or 86%, since the start of the pandemic (Feb. ’20). Notably 78% ($74.5bn) of last week’s expansion and 75% ($474bn) of the 18-week surge are shown by growth in institutional money funds (as opposed to retail). This is a reflection of the repo market “basis trade” leveraging and securities finance more generally (intermediated through institutional funds). This is why the carry trade is so influential in price action.
Before all this U.S. equities inflated $5.812 TN during Q3 to a record $91.720 TN. One-year growth of $21.105 TN, or 29.9%, compares to 2003’s pre-2008 crisis annual record gain of $4.385 TN. Over the past five years, Equities inflated $40.950 TN, or 80.7%. At 312%, Q3’s Equities-to-GDP ratio compares to previous cycle peaks 187% (Q3 2007) and 210% (Q1 2000).
The August 24, 24 Yen carry Trade swoon underscored you can’t control what you can’t control. Know your risk, and the potential impacts.
Trade Smart!
Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.
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