Carry Stress Trigger (ZAR)

A regime indicator for detecting stress in ZAR carry trades before price moves aggressively


Overview

Carry Stress Trigger (ZAR) is a regime-detection indicator that identifies early warning signals of carry-trade stress in the South African Rand (ZAR).

ZAR is one of the most widely used high-yield carry currencies, but its performance can reverse sharply when:

- Global risk sentiment deteriorates.
- Funding currencies (especially JPY) strengthen.
- Emerging market FX begins to underperform

This indicator combines risk, funding, and EM FX signals into a single Carry Stress Score, helping traders avoid being caught on the wrong side of sudden USDZAR or ZARJPY moves.

Indicator Logic (How It Works)

The model evaluates three independent conditions, each representing a core driver of carry trade behaviour:

Global Risk-Off Signal (VIX)

- Uses the VIX index as a proxy for global risk appetite
- Condition is triggered when:

VIX > its 20-period moving average

This captures rising volatility and risk aversion — a common precursor to EM FX sell-offs.

Funding Stress Signal (JPY Strength)

- JPY is the primary funding currency for global carry trades
- Condition is triggered when:

USDJPY < its 20-period moving average

A strengthening JPY often signals carry unwinds across EM FX.

EM FX Underperformance (ZAR vs USD)

- Measures whether ZAR is underperforming relative to the USD
- Uses a relative ratio:

USDZAR / DXY

The signal triggers when ZAR weakens beyond broad USD strength, isolating ZAR-specific stress rather than general dollar moves.

Carry Stress Score

Each condition contributes 1 point:

Score Regime Interpretation
0–1 Carry Friendly Risk-on environment, carry trades supported
2 Warning Stress building, caution advised
3 Carry Stress High risk of carry unwind / sharp ZAR moves

The score is plotted as a step line and optionally highlighted with background shading when stress rises.

How to Use It

USDZAR Traders

Score 0–1: Trend continuation and carry strategies more reliable

Score ≥ 2: Avoid fading USDZAR upside aggressively

Score = 3: Expect volatility expansion and fast upside spikes

ZARJPY / Carry Baskets

Score ≥ 2: Reduce exposure, tighten stops

Score = 3: Carry trades historically underperform

Risk Management

Use the indicator as a regime filter, not a standalone entry signal

Best combined with:
- Key USDZAR levels (support/resistance)
- SARB / CPI / Fed event weeks
-Volatility-based position sizing

Timeframe Notes

- The Lookback Length applies to the current chart timeframe
- On Daily charts, a length of 20 ≈ 1 trading months
- On Intraday charts, the signals become faster and more tactical
- For macro and swing trading, the Daily timeframe is recommended.

Important Notes

- This indicator is not predictive — it identifies regime conditions
- Carry trades can remain profitable even during early stress
- The strongest signals occur when Score = 3 aligns with key price levels or macro events