Global Carry Trade Unwinding

What Happened? The Bank of Japan (BOJ) raised its interest rate to 0.25% – the highest in 15 years.

Why It Matters: The Japanese yen has been central to the carry trade, where traders borrow cheaply in yen and invest in higher-yield assets globally. This strategy thrived due to Japan's long-standing ultra-low rates.

Market Impact:

- The global foreign exchange market is enormous, with a daily turnover of $7.5 trillion.

- The divergence in interest rates made the yen fall to a near four-decade low against the US dollar last month, making the carry trade very profitable.

- However, the BOJ's rate hike caused the yen to jump 7.8% over the last five trading days. It reached 141.70 per dollar, a level not seen since January.

Fallout:

- The rate hike is causing a global risk-off sentiment.

- Yen shorts are unwinding, contributing to market volatility.