Understanding the cyclicality of the dollar and the USD/JPY carry trade

A few weeks ago I ran updates here covering the formation of a monster Intra-year double top on the USD/JPY. In those updates I urged readers to consider the prospect of a deeper drop back in the USD/JPY, after it had formed the mother of all double tops, from the high in 2022 at 151.95 and the high on November 13 this year, at 151.91. The relapse that has played out since, resulted in a low seen just yesterday at 140.25. So, as you can see a fall from the top to the bottom of 1166 pips. Of course the major reason for the relapse in recent weeks has been fundamental, due to the notion the Fed is now done with raising interest rates, where the Bank of Japan might just be getting started. That has caused a significant unwinding of the carry trade in the USD/JPY. However, if that does not all play as envisaged by many next year, then that unwind may come to a grinding halt. It was also worth noting, that the yield differential at the front end still very much favours the dollar over the Yen (2 year notes at 4.29% and just 0.04% respectively). The other factor that has been at play here has been the cyclicality of the fall back in the wider dollar heading into the end of the year as currency funds and hedge fund managers reassess all this and flows shift in opposite directions. There will be much more to add on all this next year. Meanwhile, the USD/JPY is currently trading at 141.65