Trades that borrow in low-yield currencies like the yen to invest in higher-yield ones build up over quiet periods. When fear rises, they unwind, and the move can be violent.
The characteristic sign is a sharp drop in pairs like AUDJPY, NZDJPY, or GBPJPY, often together, accompanied by falling equity markets. Price moves in a way that looks like a gap, with little retracement.
For scalpers, the danger is in the speed. Stops are skipped, spreads widen, and mean-reversion setups get run over. Buying the dip on a carry pair during an unwind can be very costly.
Warning signs include rising volatility measures, a drop in equity futures, and unusual strength in the yen across several pairs at once. When those line up, caution is warranted.
A practical rule is cutting size or standing aside when yen crosses move more than a certain multiple of their average range within a short window.
The recovery after an unwind can also be quick, offering opportunities, but waiting for stability before re-engaging is wise.
What signs warn of a carry unwind, and how is exposure handled when they appear?
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Carry unwinds and how fast they move
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