A volatile start to the week characterised by historic moves in Japanese markets has further fueled the ongoing carry unwind in the yen.
Overnight, the Nikkei 225 .N225 posted its worst day since 1987, erasing gains for the year to trade at levels last seen in November 2023.

Now of course, there have been several factors at play, including a hawkish hike from the Bank of Japan, weak U.S. payrolls and escalating geopolitical tensions.
However, the chief driver remains the unwind of popular positions in U.S. tech/AI, carry and short volatility which have been blowing up one by one.
USD/JPY briefly fell below 142, marking a near 20 big figure fall from 161 in under a month.

Despite the moves, we are still not at true panic levels.
This scenario would require USD to outperform across the board, which has not been the case.
If anything, aside from yen and Swiss franc crosses, FX has been rather contained in comparison to the moves in equities and bonds.

While there has been a pick-up in recession fears in light of the recent NFP report, the ISM services PMI print will have likely eased those concerns.

Elsewhere, the stage appears to be set for a turnaround Tuesday in equities after a near 6% drop since Thursday’s trade, which in turn should pave the way for a modest reversal in both the yen and Swiss franc.

As the chart below shows, the cumulative return in the S&P 500 since 2020 after down days on Thursday, Friday and Monday is 10.8%, whereby the average return is 0.5% with a 63% hit rate.

For USD/JPY traders, U.S. yields continue to lead the way, thus, with the 10bp bounce back to 3.8% for the benchmark 10-year yield US10YT=RR, there is room for a modest rebound in the pair.

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