It’s only Tuesday, but what a week already! 😲
Yesterday, investors, traders, and degens around the world experienced a roller-coaster ride as global stock markets plunged, only to partially recover today.
A significant contributing factor to this turbulence was the unwinding of the “carry trade,” a popular but risky investment strategy.
The carry trade involves borrowing money in a currency with low interest rates, such as the Japanese yen, and then investing that borrowed capital in assets with potentially higher returns, like stocks or bonds.
When successful, the returns on these investments exceed the interest paid on the loan, generating a profit. However, this strategy hinges on stable market conditions.
Recently, a surprise rate hike by the Bank of Japan and concerns about a potential recession in the United States and “overvalued” technology stocks triggered a wave of selling.
This forced many investors engaged in carry trades to sell their holdings to repay their loans, further amplifying the market downturn.
The sudden demand for the U.S. dollar to cover these yen-denominated loans put additional downward pressure on global stock prices and major currency pairs.
While markets did manage to claw back some of their losses today, the episode underscores the inherent risks of the carry trade.
Its reliance on cheap borrowing and favorable market conditions makes it vulnerable to sudden reversals when risk sentiment sours.
Beyond the carry trade, other factors contributed to the market turmoil. Fears of a U.S. economic slowdown, coupled with anxieties over inflated stock valuations in big tech and AI/semiconductor companies, further fueled the sell-off.
The carry trade’s role in exacerbating volatility across different assets, from forex to stocks to crypto, serves as a reminder of the interconnectedness of global financial markets.
Regarding the U.S. dollar, after the crazy price action from the carry trade unwind, it’s showing signs of stabilization against the Japanese yen.But while USD/JPY rallied slightly, things are still a bit uncertain. We’ll have to wait and see what happens next.
Some analysts estimate that only about half of the carry trade has been unwound, suggesting more market turbulence is possible!
Currency Market Movers
Let’s review the price action in forex today.
Which currency pairs gained the most today?
AUD/JPY was the leader of the pack, gaining 0.48% or 45 pips.
As shown by our FX Market Movers page, the top 5 gainers had pretty small gains.
Looking at the AUD/JPY Trend Following Rating, it’s been showing an extremely Bearish rating.
But the AUD/JPY Overbought/Oversold Rating is showing an “Oversold” rating.
Which currency pairs lost the most today?
GBP/AUD was the biggest loser, falling 0.95% or 187 pips.
Currency Strength
What was the overall strength or weakness of individual major currencies today?
Based on the Currency Strength Meter on MarketMilk™, JPY was the strongest currency, while GBP was the weakest currency.
If we dive a little deeper and look at just how major currency pairs moved over the past 24 hours, we can see USD/JPY surging when the Asian session opened, getting sold off, and then attempting to rally multiple times throughout the day.
Currency Short-Term Trends
When it comes to short-term trend strength, the Japanese yen (JPY) and Swiss franc (CHF) are showing bullish strength.
GBP showing the most bearish strength.
Currency Heat Map
If we take a look a look at our Currency Heat Map, we can see CHF and JPY breaking above their previous week’s and month’s highs.
Currency Volatility
Which currency was the most volatile today?
Based on our Currency Volatility Meter, it’s the Japanese yen (JPY).
Looking at the Currency Volatility History over the past 24 hours, you can see how volatile JPY was during all three forex trading sessions!
Which currency PAIR was the most volatile today?
Given that JPY was the most volatile currency, it has to be a JPY pair. But which one?
GBP/JPY. It moved over 2.35% or 429 pips!
