The market turbulence and carry trade unwind of August 2024

Key takeaways

• Financial market volatility resurfaced in early August as the unwinding of leveraged trades in equity and currency markets amplified the initial reaction to a negative macro release in the United States. Markets then stabilised quickly, and volatility receded.
• FX carry trades were hit hard by the deleveraging pressures. Their overall size is difficult to measure. Various estimates based on both on- and off-balance sheet activity yield a rough middle ballpark of ¥40 trillion ($250 billion) going into the event, which, if anything, is biased down due to data gaps.
• The event was yet another example of volatility exacerbated by procyclical deleveraging and margin increases. Although an outright market dysfunction was averted this time, the structural features of the system underpinning such episodes deserve continued attention by policymakers.