Here is how the Japanese Yen (JPY) carry trade will collapse in 8 steps:
1. BOJ hikes interest rates, increasing the cost of borrowing for the carry trade.
2. Traders face rising carry trade loan repayments, driving up demand for JPY.
3. Sharp rise in JPY triggers the start of the carry trade unwind.
4. Traders face margin calls, leading to forced liquidations.
5. Liquidity evaporates, causing severe volatility in FX markets.
6. Widening bid/ask spreads intensify selling pressure.
7. Contagion spreads to global markets, sparking a broader sell-off.
8. Crash mirrors the rapid collapse seen in Terra Luna.
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