The peso depreciates, the yen and the renminbi soar, global arbitrage trading faces a "major collapse"!

The unwinding of global arbitrage trades has turned into a major debacle, causing turbulence in global markets with the Japanese Yen and Chinese Renminbi strengthening.

On Monday, major global stock indices experienced a cliff-like plunge. As the selling pressure on risk assets intensified, all assets, including stocks and cryptocurrencies, were severely hit.

The foreign exchange market suffered, with the Australian Dollar falling by about 2%:

The Mexican Peso against the US Dollar dropped by over 5%:

The two currencies commonly used in financing arbitrage trades rose - the Japanese Yen surged by over 3%, with the USD/JPY rate falling to 143;

The Renminbi rose by about 0.7%.

The sudden appreciation of financing currencies has damaged arbitrage strategies, which involve borrowing funds at low rates to invest in high-yield assets. The appreciation of the Japanese Yen and Renminbi has made this strategy no longer profitable.

Concerns are growing that the Federal Reserve is lagging behind the situation in supporting the slowdown in the US economy. Investors are seeking bonds as safe-haven assets. The yield on the US 10-year Treasury fell by 5 basis points to 3.74%; China's 10-year Treasury yield fell below 2.10% for the first time on record.

Due to concerns about a US economic recession, market volatility has increased, further impacting arbitrage trades. Alvin Tan of Royal Bank of Canada stated that concerns about the risk of a US economic recession are unfavorable for arbitrage traders.

The risk of an economic recession also means increased market volatility, leading to a reduction in arbitrage trades.

I believe this situation is likely to continue as we have been in a low volatility environment for over a year now.

Investors who were banking on arbitrage trades may find that previously effective arbitrage strategies may no longer work: the Bank of Japan raised interest rates for the second time at its recent meeting and hinted at further hikes; data shows that the returns of a basket of emerging market currencies priced in Renminbi are negative, while trading profits denominated in Yen have been nearly wiped out ATFX Global Markets Chief Market Analyst Nick Twidale said that a large number of arbitrage trading positions were being sold off, with "everyone fleeing at the same time".

These actions were initially triggered by the Bank of Japan's interest rate hike, but global economic growth concerns have further exacerbated the situation in the past few days, leading to intensified volatility