Carry trade unwind could replicate August mayhem, suggests currency strategist, as yen strengthens

The unwinding of the yen carry trade is expected to continue in September, presenting a risk of another large sell-off, according to Kathy Lien, managing director of forex strategy at BK Asset Management. 

Speaking to CNBC's "Squawk Box Asia" on Monday, Lien predicted that downward trends in U.S. yields and the dollar would continue to drive the Japanese yen higher.

"We have a risk off mood, which we're already seeing across financial markets, and that is going to lead to the ongoing unwind of carry trades that we have seen already," Lien said, adding that yen traders will be watching equity prices and taking cues from them. September typically represents a volatile month for stocks.

"Maybe it's going to be a much more aggressive unwind, like we saw back in August, if we do get a significant sell off in stocks," she said. 

Carry trades refer to a practice in which investors borrow in a currency with low interest rates and then reinvest those proceeds into higher-yielding assets elsewhere. 

"I think there is still a lot that can unwind, especially if you look at how undervalued yen is. That is going to change the valuations for the next one to two years to come. That's going to have spillover effects," Richard Kelly, head of global strategy at TD Securities told CNBC's "Squawk Box Europe," last month.

The Japanese yen had become one of the largest carry trades the world had ever seen, as the Bank of Japan's negative interest rates kept the yen substantially weaker compared to peers.

This carry trade began unwinding in August when the BOJ hiked its interest rates, triggering a strengthening of the yen and a dramatic sell-off in global markets.

After strengthening for four straight days, yen weakened 0.38% against the dollar to