[jyl]

Not market manipulation. A whole bunch of professional traders just got forced to liquidate a whole lot of positions in a hurry, because the yen carry trade blew up.

Japanese interest rates have been near zero, so a trader (not really a retail trader, think institution) could borrow 160 JPY for less than 1%/yr, sell it for 1 USD and use that dollar to buy a Treasury bill paying 5%/yr. If more aggressive, buy US stocks, bitcoin, Mexican short term bills, etc. That is called a carry trade. Lots of institutions made lots of money on this trade. Of course they are borrowing 1.6 billion JPY, not 160. Total size of the yen carry trade, in this and other forms, was about USD 4 trillion - per some estimates, others think more.

Unfortunately for them, Bank of Japan has been talking about raising rates which would strengthen the yen, the Japanese govt has been intervening in FX markets to strengthen the yen, and the US Federal Reserve is going to start cutting rates which will tend to weaken the US dollar. Then last week there was some weak economic data in the US which made some investors think the Fed will accelerate or upsize rate cuts, and the BoJ delivered a surprise rate hike. In two weeks the JPY went up 11% against USD.

So now the 1 USD you bought with your borrowed 160 JPY is only worth say 140 JPY, an 11% loss (don’t check my math, I’m doing this from bed). Oh and your NVDA or bitcoin or S&P 500 went down say 5%. So you just lost 16% in two weeks. But actually you, or rather your institution, borrowed 1.6 billion JPY with only say 0.4 billion JPY of its own capital. So the leverage that was so great when the trade was working, means you actually lost 80% of that capital.

At some point in the last week or two, your risk control guys tapped you on the shoulder and told you to liquidate your positions. If you actually were levered 4:1, that tap was at least a week ago because your risk control guys are not going to sit and watch you lose that much of the firm’s capital. Other traders got the tap a week ago, or on Friday.

When you get the tap, you sell regardless of price. But some significant part of a USD 4 trillion trade is being sold at the same time, by guys who also got the tap. And buyers (sophisticated ones) see what’s going on, they aren’t buying at today’s price. So the price plummets. For all kinds of things, because if you can’t sell one position you sell another one - basically whatever is liquid that you have gets sold, whether it’s part of the carry trade or not. You’re facing a margin call, if you don’t sell then it will be sold for you.

Anyway, a bunch of institutions and funds lost a bunch of money unwinding their trades - there are other trades that got broken, not just the yen carry trade - and pulled almost all asset prices down in the process. Don’t know if the unwinding is done, lot of guessing going on, but my guess is it is mostly done for yen carry, not so close to done for some of the other trades. But it will get done, in days most likely, maybe weeks.

Then other traders look at where prices are and what looks good now. And eventually the yen carry trade gets re-established. BoJ just did a mea culpa and all but promised not to do a surprise cut again, and the rate spreads are still wide.