Image Source: Pixabay

Back in April, I sent you a letter talking about a potential currency crisis, specifically on the Japanese Yen. As it turns out, we were months ahead of the curve, as the Bank of Japan finally lifted off the zero bound recently, which led to a massive rebound in the Japanese Yen.

To be clear, these types of moves don’t happen very often. But various cyclical indicators that I use, along with technicals, and a sound understanding of macroeconomic principles had all of my risk indicators flashing red surrounding the Japanese Yen.

Now that the “crowd” has caught onto this move, does it mean that most of it is over? Its side effects spilled over into stocks as I expected, as we saw the biggest spike in volatility since 2020.

Is this just the beginning of a greater downturn? Or is the majority of the move already complete? Here’s what I think…

The Great Carry Trade Unwind

Now that the Japanese Yen is on everyone’s radar, I’ve come across countless articles in the last week describing the situation. I’ve seen estimates between 50-75% of the carry trade being unwound already.

They say a picture is worth a thousand words. I suppose the same can be said for charts like this. To be clear - a $20 move in USD/JPY is nothing short of massive, and you better believe people were margin-called left and right over the past month.

As I look at this chart from a technical perspective, I’m concerned that there may be more downside in this currency. It’s consolidating its losses, which is generally bearish price action.

If this drops again, and it was the cause for stock market volatility, then we can’t rule out another wave of selling. Of course, the exception would be if we decoupled in this correlation, but for now, it’s going strong.

I’ll be sure to keep you posted,

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