A scramble by hedge funds caught out by a surge in the yen to unwind so-called carry trade bets, has been blamed for the massive stock sell-off that shook global financial markets on Monday, according to a report by the Financial Times.
The popular strategy, which saw money mangers borrow yen at cheap rates to exchange for other currencies to invest in higher-yielding assets, began to unravel as the yen surged by 12% over the past month partly on the back of the Bank of Japan's decision last week to raise its base rate for only the second time in 17 years.
Japan experienced a significant exodus from shares, with stock prices plummeting by 12%. This market turmoil reverberated worldwide, causing sharp declines in share prices in London and on Wall Street as investors rushed to reduce risk and liquidate assets.
The global market downturn wiped trillions of dollars off share values, and the uncertainty extended to the crypto market, where bitcoin's price fell by up to 15% before recovering to trade at $54,102.
Weak US job numbers and skepticism about the valuations of major US technology firms contributed to the negative sentiment. However, analysts point to the unraveling of the "yen carry trade" as a key factor that triggered and exacerbated the panic.
The report quotes Kit Juckes, Chief Currency Strategist at Société Générale, as saying: "You can't unwind the biggest carry trade the world has ever seen without breaking a few heads."
Mark Dowding, chief investment officer at BlueBay Asset Management, noted that several macro funds – large hedge funds that bet on currency and securities prices – were "caught the wrong way around on a trade."
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