Risk register · entry
Q4 · Where models dieYen carry-trade unwind
A small BoJ hike unwound the global carry trade; Nikkei's worst since 1987.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this quadrant
The carry trade's payoff structure was simple and its historical tail thin, a steady spread collected under models that assumed low, stable volatility, but the BoJ hike and US jobs shock revealed a fat tail the models had not priced, so risk migrated from simple/thin-tail into the complex, correlated, model-breaking territory that defines Q4.
The record
- Bank of Japan raised policy rate from ~0-0.1% to 0.25% on July 31, 2024certain
- US July 2024 jobs report added 114,000 jobs vs 175,000 expected, released August 2, 2024certain
- Sahm Rule triggered in July 2024 (3-month average unemployment 0.53 points above 12-month low)certain
- Nikkei 225 fell 12.4% on August 5, 2024, worst single day since October 1987certain
- TOPIX index fell about 12% on August 5, 2024 (per BIS)certain
- Nikkei 225 lost 4,451 points on August 5, 2024, its largest one-day point drop on recordlikely
- Two-day cumulative Nikkei decline of 18.2% (Aug 2 down 5.8%, Aug 5 down 12.4%)likely
- VIX briefly exceeded 60 in pre-market trading on August 5, 2024certain
- S&P 500 fell roughly 3% on August 5, 2024likely
- Yen appreciated roughly 6% against the dollar in the days around the unwinduncertain
- BIS estimate of the carry-trade unwind at a 'rough middle ballpark' of about $250 billionlikely
- Nikkei 225 rebounded about 10% on August 6, 2024certain
- Mexican peso, Brazilian real, Turkish lira, and crypto assets also sold off in the same windowlikely
Sources
The newsletter
One risk story a week, taken apart the way this one was: what was known, what was ignored, and which quadrant it really belonged to.
No spam, one email a week.