Experts Reveal Carry Trade’s Real Role in August’s Market Crash

On Monday, August 5, after Japan’s market lost ground, European and U.S. stocks followed, triggering a global panic sale. While stocks around the world were recovering as the week progressed, the event is not only far from over — and could happen again.

The sharp decline in global stock markets was triggered by a confluence of factors. A disappointing U.S. jobs report fueled fears of an impending economic slowdown, while overvalued tech and AI stocks, coupled with the ongoing cryptocurrency turmoil, exacerbated the situation.

However, experts argue that the primary culprit behind the market crash was the unwinding of carry trade operations.

Table of Contents Table of Contents

1. The Yen Carry Trade 'Unwind' is Far From Over
2. Carry Trade Tech Ethics Contribute to GlobalFinancial Instability
3. Value Investors and Crypto Experts Talk Post-Crash Money Moves
4. The Bottom Line

Show Full Guide

Table of Contents

1. The Yen Carry Trade 'Unwind' is Far From Over
2. Carry Trade Tech Ethics Contribute to GlobalFinancial Instability
3. Value Investors and Crypto Experts Talk Post-Crash Money Moves
Show Full Guide
4. The Bottom Line

The Yen Carry Trade ‘Unwind’ is Far From Over

On August 6, JPMorgan warned that the ongoing unwinding of the carry trade is far from over.

“We aren’t done (with carry trades) by any stretch,” Arindam Sandilya, co-head of global FX strategy at JPMorgan Chase & Co told Bloomberg.

Carry trade operations were indeed a significant factor contributing to the global stock market meltdown of Monday.

These trades involve borrowing money in a low interest rate currency (like the Japanese yen) to invest in assets denominated in a higher-yielding currency (like the U.S. dollar). Numerous carry trades are carried out by U.S. brokers operating in the Japanese market.

The carry trade strategy has been particularly popular due to Japan’s long-persisted ultra-low interest rate policy, which created a substantial interest rate differential between Japan and other major economies.

Carry Trade Tech Ethics Contribute to GlobalFinancial Instability

According to CNN, the ‘yen carry trade’ is now “blowing up in investors’ faces.” For the past four years, Japan has been the go-to country for cheap money due to its near-zero interest rates.

But when the value of the yen began increasing last week, cutting into carry trade profits and making loan repayment more expensive due to new Japan Bank interest rates, the massive influx of carry traders rushed to close and sell off (unwinding) their operations.

Kit Juckes, global macro strategist at Societe Generale, explained what the unwinding consequences are.

“You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads.”

But what role did new technologies and innovations play in this scenario? It turns out that quite a lot. Carry trade tech — like other financial technologies — has been undergoing a radical digital transformation for the past five years.

Carry trade technology has become widely available and accessible. It is easy to use, even for those who are not market or tech-savvy.

Additionally, driven by advancements in artificial intelligence (AI), machine learning (ML), and high-frequency trading, sophisticated algorithms now analyze vast data sets to identify potential carry trade opportunities across multiple asset classes, including currencies, bonds, and commodities.

Innovation in carry trade tech has led to a significant increase in the speed and efficiency of trade execution, enabling firms to capitalize on fleeting market inefficiencies.

But as the saying goes, with great power comes great responsibilities and great risks.

Value Investors and Crypto Experts Talk Post-Crash Money Moves

Evidently, the crash revealed a clear distinction between value investors and those engaging in carry trades or other arbitrage strategies that exploit economic disparities.

Ben Kurland, CEO of the crypto research and charting platform DYOR, spoke to Techopedia about how volatility creates exaggerated panic in the market and how value investors should react.

“While the overall macro-economic situation remains quite tense, this certainly feels like an overreaction considering the scale of the sell-off.”

For those holding AI and tech stocks or crypto, Kurland highlighted value investment principles and how they can leverage the downturn.

“For tech stocks and crypto, it’s crucial to focus on long-term fundamentals rather than short-term volatility. The hype is not over, but it certainly is overheated in the short term. These larger corrections are good entry points.

“Beyond that, we should see increased caution on riskier assets until there is more clarity.”

Vijay Marolia, a seasoned money manager with over 20 years of capital markets experience, and founder and chief investment officer of the Regal Point Capital Group, also spoke to Techopedia about the sell-off and long-term investment values.

“I don’t think any panic is warranted — this is just a healthy correction. For long-term investors, this presents a fantastic buying opportunity.That said, it’s difficult to call the bottom, so building positions slowly over time may be wise.”

Lou Kerner, a veteran of the crypto industry, and Co-Founder of the CryptoOracle Collective, a decentralized Web3 consultancy company, spoke to Techopedia about the power of AI and tech stocks.

“Over the last 10 years, 70%+ of tech market cap gains have gone to six companies — Meta, Apple, Microsoft, Google, Amazon, and Nvidia.”

“We expect tech to continue to outperform the rest of the market and for those gains to be increasingly concentrated in those six companies.”

The Bottom Line

As the world becomes more interconnected and trades happen with boosted input from AI, ripples become waves at a much faster pace.

Carry trades had a big impact this time around — the increasing value of the yen led to hordes of traders changing their strategies.

The old saying about “a butterfly flapping its wings” still holds true, but as dependencies and signals become more interlinked, the typhoons that occur elsewhere can spin up faster than ever.