The Yen Tailwind to Tech Stocks

In the trader's guidebook of how to trade, it’s quite common to cement the nostrum "don’t fight the Fed" into one’s brain.

Many know this.

In 2022, this nostrum served traders quite well as interest rate increases left the tech market in the dust.

Major tech stocks ($COMPQ) from Meta (META) to small-cap Zoom Video Communications (ZM) fell flat on their face.

That was when "don’t fight the Fed" was the smart thing to do.

Fast forward to 2023 and the Fed is still marching towards more interest rate tightening, but astonishingly the opposite has happened, it has paid to fight the Fed this year.

Not only that, the tech-based Nasdaq has gone parabolic, delivering gains of already over 30% in just the first 7 months.

Anyone that hasn’t fought the Fed has been left bloody in the streets like a standard Parisian riot.

One piece of the puzzle that often gets overlooked is one major catalyst to this trade which is the Japanese yen carry trade.

This is how the trade has worked for many hedge funds this year.

Borrow in Japanese yen because the cost of borrowing is still puny compared to yields in Western countries.

Take that yen back over to the Western equity markets and pour them into stocks like Nvidia, Meta, Apple, Tesla, Microsoft, and Amazon.

The strategy has worked like clockwork and I know many traders that have made second and third fortunes off of the back of this trade so far this year.

Traders have boosted short positions on the yen as the currency moved steadily lower this year amid widening divergence between the Bank of Japan’s easy policy and aggressive hiking cycles for other central banks, notably in the US and Europe.

Talking about the Yen is timely as reports of lower US job numbers and increased Japanese wage gains triggered a one-day selloff in the dollar.

We won’t see a complete unwind of the yen carry trade just yet but the carry trade had gotten a little too long in the tooth, so this is profit-taking to readjust positioning.

If volatility stays high then it will continue to unwind, but if volatility stabilizes then the Japanese yen carry trade parade will continue unabashed.

The yen is one of the worst-performing Group-of-10 this year, reaching 145 per dollar last month, a level unseen since November.

What’s next?

Nothing has fundamentally changed.

The US isn’t going into a recession this year and even if credit card delinquencies are up and household net worth is struggling in America, it’s not enough to move the needle to deter the Japanese yen carry trade.

The mild pullback against the US dollar is in fact a golden opportunity for traders to pour back into the short Japanese yen trade.

As long as the Japanese yen remains weak, tech stocks won’t crack because this liquidity is the lifeblood to many tech stocks.

We have been crowbarred into this goldilocks environment of higher equities, higher bond yields, and now US housing is starting to bounce back.

The Nasdaq has been ironclad this year and even if I don’t think it will deliver another 30% to finish the year, the pain trader is higher in tech stocks, marginally higher in bond yields, higher in US housing, and short Japanese yen.

Until we receive some type of concrete confirmation that this pain trade is over, I expect to grind up in the aforementioned asset classes.