“A carry trade is essentially just trying to benefit from a higher interest rate in one area, funding it out of a low interest rate environment in another. Carry is just another word for interest really,” says M&G fund manager Tristan Hanson.
Typically, a trader then just lets the investments “sit and benefit from the short-term money market rate in each of these currencies”, Balcazar says.
“Some people juice it up a bit. In its more speculative version, it would be going into for example corporate or emerging market bonds or sometimes equities.
“Maybe some of it found its way into tech equities, which everybody thought would just go up forever.”
This means an investor with a bigger risk appetite may have borrowed money in Japan, exchanged it into dollars or pounds and used it to effectively lend money to Sainsbury’s, buy Ghanaian government bonds or purchase shares in Apple.
“That all goes fine and well as long as the yen depreciates,” says Balcazar.
Last month Donald Trump raised the temperature for investors watching the money roll in. He suggested in an interview that the dollar was too strong against China and Japan’s currencies, leaving US manufacturers struggling to sell their products.
“We have a big currency problem,” the former president who hopes to win the US election in November told Bloomberg.
Meanwhile, as central banks around the world started lowering interest rates, the Bank of Japan took everyone by surprise by raising borrowing costs from 0.1pc to 0.25pc, and signalling it was prepared to go further.
“The market is being triggered partly by deteriorating US economic data, but is reacting in a way that’s consistent with a much bigger deterioration than what we have actually seen,” says Sam Lynton Brown, head of global macro strategy at investment bank BNP Paribas.
“That much bigger move in the market can be well explained by positioning, and in particular, as it relates to Japan, an unwind of what’s been a very, very large trend.”
This resulted in a domino effect. It illustrates how seemingly separate events such as a remark by Donald Trump, a decision by Japanese technocrats and a few traders manning the desks in August contributed to stock market meltdown.
