Trading can be more than jusf looking at charts as real money flows are often driven by more than just technicals.
This has been the case of late with the sharp drop in USDJPY has been fueled by unwinding of carry trades.
What is A carry trade?
Strictly speaking, carry trade is a strategy used in the financial markets where an investor borrows money at a low-interest rate in one currency and uses it to invest in another currency or financial instrument that offers a higher return. The primary goal is to profit from the difference between the interest rates, known as the “interest rate differential.” Here’s a basic rundown of how carry trades work:
Borrowing in a Low-Interest Currency: The investor borrows funds in a currency with a low-interest rate, such as the Japanese yen (JPY) or the Swiss franc (CHF).
Investing in a High-Interest Currency: The borrowed funds are then converted into a currency with a higher interest rate, such as the Australian dollar (AUD) or the New Zealand dollar (NZD), and invested in financial instruments like government bonds or other assets that yield a higher return.
Earning the Differential: The investor earns the difference between the higher interest earned on the investment and the lower interest paid on the borrowed funds.
Example of Carry Trade
Borrow: Borrow 1,000,000 JPY at an interest rate of 0.5%.
Convert and Invest: Convert the 1,000,000 JPY into AUD and invest in Australian government bonds yielding 5%.
Profit: Earn the interest from the Australian bonds (5%) and pay the interest on the Japanese loan (0.5%), keeping the difference as profit. (Full transparency, I used ChatGBT for the carry trade definition)
However, in reality, hedge funds, for example, borrow low yielding currencies such as the JPY and CHF and use the proceeds to buy bonds, stocks, cryptos, metals and commodities. So, when these massive positions unwind, as happened recdently, it can affect all markets.
The following is an article worth reading so you will understand the impact of carry trades.
This may be alot to digest but it is important to be aware of what drives what you are seeing on your charts and times that those exiting positions care more about liquidity than price.