Kevin Luke J30 Evans#96

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What is carry trade unwinding and why is it dangerous?

Carry trade unwinding occurs when investors exit high-yield positions en masse due to shifting risk sentiment. For example, traders borrowing JPY to buy AUD may suddenly reverse when global risk appetite falls, causing AUD/JPY to crash. These unwinds are fast, violent, and often erase years of steady gains in days. They usually occur during crises or interest rate shifts. The danger is liquidity drying up, causing slippage and gapping stops. Traders relying on carry must monitor risk sentiment indicators like VIX and global bond yields. Managing exposure and using options as hedges can reduce the pain of unwinds.