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Risk-off and the yen: how the surge unfolds

When fear hits, the yen tends to rise. Investors unwind carry trades, repatriating funds and buying back the currency they borrowed.

The pattern on the chart is recognizable. Equity futures fall, then the yen crosses start to slide. AUDJPY and NZDJPY drop first and hardest, since they were popular carry positions. USDJPY follows, with a lag. EURJPY and GBPJPY join.

The speed can be dramatic. A 200 pip drop in AUDJPY within an hour isn't rare during a panic. Spreads on the crosses balloon, and stops are filled with heavy slippage.

For scalpers, risk-off events are dangerous for those long the crosses and tempting for those short. Fast movement and gaps make both difficult.

The unwind usually ends in exhaustion, with a sharp bounce when the last forced sellers are done. Predicting the moment is hard.

Early warning from a yen cross: which one shows stress first, and has it been worth watching?

In risk off episodes, the yen often strengthens as investors unwind carry trades and seek safety. The move can be fast, especially when it involves crowded positions. In early August 2024, for example, the yen surged as carry trades unwound after a Bank of Japan rate rise and weak US data, with USD/JPY falling sharply over several days and global stock markets dropping. Moves like that can be much larger than normal daily ranges and can catch scalpers off guard. USD/JPY fell from above 161 in early July to below 142 in early August, a move of more than 10 percent in a few weeks.

The cross I ended up watching is not one of the obvious ones. In my notes from several risk-off mornings, CADJPY and sometimes CHFJPY gave me a slightly earlier clue than AUDJPY, mainly because their spreads started widening a few minutes before the move. I now keep a small watchlist showing the live spread on four yen pairs, and when two of them are more than double their usual reading I stop opening new trades on any of them.

The second thing I learned is how ugly the first bounce is. During one sharp morning I was short AUDJPY, up nicely, and tried to hold for more. The retrace came in under ninety seconds and took back about 60 pips from my open profit. Since then I take half off at the first sign of stalling, and I do not re-enter for at least ten minutes.

For anyone testing this, the equity futures chart is still the first alarm for me, and the yen crosses just confirm it.