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Carry Trade Unwind Risk Builds in USD/JPY Market
By: David Scutt, Market Analyst
The USD/JPY strength is being increasingly shaped by underlying positioning risks rather than just macro fundamentals. Elevated energy prices, persistent policy divergence and shifting rate expectations are reinforcing a crowded carry trade environment. This creates a fragile setup where gains are sustained not only by yield differentials but also by leveraged positioning. When positioning becomes dominant, the risk of a sharp reversal rises significantly, especially under changing global conditions.
David Scutt, Market Analyst at FOREX.com, has extensive experience analyzing global foreign exchange markets through cycles of volatility and policy change. His focus on cross-asset relationships and macro drivers provides a clear lens into how carry trades interact with shifting economic and financial conditions.
Key Themes
- Carry trade positioning in USD/JPY remains supported by yield differentials despite rising volatility risks.
- Disorderly unwinds could be triggered by higher Japanese borrowing costs, stronger yen or falling global asset prices.
- Policy divergence between the Federal Reserve and Bank of Japan continues to anchor the carry trade setup.
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Discover Actionable Insights with the latest Market Outlook ReportsCarry Trade Positioning Amplifies USD/JPY Downside Risk
USD/JPY carry trade positioning is increasing the risk of a sharp downside move as leverage builds across global markets. This vulnerability is highlighted by Scutt’s warning that "there is also the risk of a disorderly unwind in carry trades", pointing to a scenario where positioning unwinds rapidly rather than gradually. Consequently, a shift in global risk sentiment could trigger simultaneous position closures, accelerating moves lower in USD/JPY. For investors, this means that what appears to be a stable trend may in fact be highly sensitive to sudden changes in market conditions.
Global Volatility Shifts Could Trigger Rapid Yen Strength
Global volatility dynamics are increasingly central to USD/JPY direction as the yen behaves less like a safe haven and more like a funding currency. Scutt notes that "that would likely be driven by a combination of high borrowing costs in Japan, a strengthening yen and a decline in global asset prices", underscoring the interconnected triggers behind a potential unwind. As a result, rising volatility in equities or tightening financial conditions could force investors to exit carry positions, strengthening the yen abruptly. This creates asymmetric risk where downside moves in USD/JPY could be faster and more aggressive than the gradual upside seen during the build phase.
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--- Written by Lindo Xulu, StoneX TV Journalist
--- Expert: David Scutt, Market Analyst at FOREX.com
- Currencies
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