Well that escalated quickly. The volatility observed over the last few sessions is in no small part due to the Japanese carry trade beginning to unwind. For those unfamiliar with the matter, the super low interest rates in Japan have made it very cheap to borrow the Yen; the borrowed Yen is then carried over to foreign currencies with higher yields, as well as foreign assets. Last week the Bank of Japan increased rates to a mere 0.25%, up from 0.1%. For reference, the rate set by the Fed is currently 5.5%. The change in differential was enough to prompt a move back into the Yen, to ruinous effect.
The consequences were most apparent in Japanese markets, with the Nikkei 225 plummeting 12.4% on Monday, its worse day since the infamous Black Monday crash of 1987. Equally unexpected was the sharp rebound the following day, no less than a 10.2% gain. Stock markets around the world have experienced a similar pattern over the past two days, albeit in more muted terms. The reaction in crypto was not exactly a soft one either, with bitcoin closing the day 7% lower on Monday but not before smashing all the way down below $50k. Other cryptocurrencies fared even worse.
Strong signs from Japan again this morning, with the Nikkei 225 already up another 2% at the time of writing. Difficult to say if recent events are a portent of things to come, but several publications have posed the question: will the Federal Reserve enact an emergency rate cut to stabilise markets? Following journalism rules then the answer is no, but the next decision is set for the 18th of September anyway, and the Fed is running out of excuses not to lower rates.
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