A major unwinding is underway amid a stock sell-off

A rapid unloading of “carry trades” extended on Monday, with market participants seeking to roll back on the popular strategy amid a dramatic global sell-off in risk assets.

Carry trades refer to operations wherein an investor borrows in a currency with low interest rates, such as the Japanese yen, and reinvests the proceeds in higher-yielding assets elsewhere. The trading strategy has been hugely popular in recent years.

Traditional safe-haven assets, such as the yen and the Swiss franc, surged on Monday, fueling speculation that some investors were seeking to quickly unload profitable carry trades to cover their losses elsewhere.

“You can’t unwind the biggest carry trade the world has ever seen without breaking a few heads. That is the impression markets give us this morning,” Kit Juckes, chief foreign exchange strategist at Societe Generale, said in a research note published Monday.

Juckes said that a recent batch of weaker-than-expected U.S. economic data, including the labor market report of Friday, manufacturing data and few other soft indicators, had sparked “a huge reaction” in a thin August market.

“That’s the easy bit to understand. The tougher question is what happens next,” he added.

Juckes flagged that the biggest foreign exchange market reaction was still one of “position reduction.” He said long positions against the Japanese yen for the Australian dollar, British pound, Norwegian krone and U.S. dollar were all being taken off.

A push below 140 a dollar for the Japanese yen in the near term “would be unsustainable given the impact on equities and inflation,” Juckes said.

The Japanese currency has risen sharply against the U.S. dollar in recent weeks, trading at 143.57 per dollar at 3:10 p.m. London time on Monday. It marks a stark contrast from the run-up to the July 4th U.S. holiday, when the yen fell to 161.96 per dollar for the first time since December 1986.

Alongside weak U.S. economic data, an August stocks slump has been exacerbated by disappointing major tech earnings and by a more hawkish Bank of Japan. A change in Japanese monetary policy prompted one strategist to warn of the “implosion” of the yen carry trade over a short-term basis.

Separately, Russell Napier, co-founder of the investment research portal ERIC, said in a recent installment of his “Solid Ground” macro strategy report that investors have now been provided with a glimpse of the impact that a change in Japanese monetary policy can have on U.S. financial markets.

Ed Rogers of Rogers Investment Advisors said the yen carry trade isn’t dead yet, despite the deepening stock market sell-off.

“Certainly there is going to be some momentary panic, I think, about the yen carry trade. I don’t think it is over. I don’t think it is dead,” Rogers told CNBC’s “Street Signs Asia” on Monday.

“There is still significant interest rate differential to be taken advantage of but … a lot of people are looking to cover existing positions shall we say, and yen carry trade could well be one of them that people are spooked about,” he added.