Hello Trader,
A large slice of the tech rally over the past few years was bought with borrowed money. The money didn’t come from here. It came from Japan.
That arrangement started wobbling a few weeks ago.
The pundit class has already decided it means a crash is coming.
I’m going to explain how the trade works in plain English. You’ll see the one time it actually broke the market, why I think this time runs the other direction, and how I’m positioned into next week.
Here’s the mechanic. Japan has kept interest rates near zero for decades, so borrowing Yen is cheap.
A trader borrows Yen, converts it to Dollars, and buys something that pays more than the loan costs. That gap is the profit.
Traders call this the carry trade.
It gets better when the Yen falls. You borrowed in a currency that’s losing value, so the loan shrinks while your Dollar assets climb.
There’s one way this goes wrong. The Yen strengthens, the loan gets expensive to repay, and you sell whatever you bought to cover it.
That’s the unwind everyone is worried about. It happened in August 2024, and it dragged stocks down with it.
Why 2024 Doesn’t Map Onto Today
A few weeks ago, the Department of Treasury stepped into the currency market to push the Yen higher. They sold Euros and bought Yen to do it.
Japan’s central bank moved to support the Yen around the same time. That tells you the effort was coordinated.
The Yen now sits in roughly the same neighborhood against the Dollar as it did in summer 2024. That single similarity is doing all the work in the bearish argument.
Nothing exists in a bubble in macro land. Three things separate that period from this one:
- Oil traded about $20 lower in summer 2024, and it sits at $90 to $92 resistance today
- Powell had inflation under control and cut rates by 50 basis points just months before the election
- The Fed is now debating a hike, with the decision landing September 15
Inflation was tame back then, so Powell had room to act. He doesn’t have that room now.
We’ve watched the same chain repeat all year instead. Crude oil rallies, rates rise, capital piles into Dollars, and the equity market takes the hit.
What The Real Risk Looks Like
A firmer Yen pulls the Dollar down with it.
Dollar weakness has been a tailwind for stocks, metals, and crypto every time we’ve seen it this year.
The Dollar is the world’s safe haven asset. A Dollar losing value tells me we’re not in crisis mode.
So a gradual carry trade unwind sits low on my list of concerns. The scenario that would actually worry me is the Bank of Japan losing control of the Yen entirely.
Friday’s jobs number came in hot, which points toward a hike. The inflation report next Friday settles it.
The bond market’s reaction was more interesting than the headline. The 10-year Treasury hit a new low while the 30-year Treasury did not.
Both finished well off their session lows.
When the long end refuses to confirm the short end, something in that story is wrong. I lean toward the panic being overdone.
I’m carrying long exposure into next week with a cash cushion in reserve. My downside target on Dollar Yen sits at 152 to 153.
Crude oil remains the last domino.
Oil breaking down from this resistance zone pulls rates lower, pulls the Dollar lower, and clears the runway for stocks.
One more thing worth knowing. The Treasury’s bond buyback program starts Wednesday and runs through November 4.
Plenty of commentary online has already called it a failure. It hasn’t even started.
This is why you can’t marry a macro narrative without confirmation from price action. Positions matter more than opinions.
Stay open-minded on this and I’ll keep you posted. Enjoy your weekend,
Take Care,
Gianni Di Poce
