Nothing matters until it matters. Then it matters in a big way.
So many times, we’ve experienced markets where bad news doesn’t seem to matter – where things we think would cause stocks to pull back are simply shrugged off.
This is one of those times.
Higher long-term interest rates – doesn’t matter.
Replacing the Fed Chairman – doesn’t matter.
Military action around the globe – doesn’t matter. I could go on and on.
Inevitably, something obscure happens that finally gets investors to pay attention. Then, all those things that didn’t matter are suddenly HUGE concerns.
What could be the obscure catalyst this time? How about the “yen carry trade” blowing up?
Let me explain…
The “yen carry trade” is based on the possibility of borrowing money at near 0% interest and then investing that money to make 5-10%.
Traders borrow the Japanese yen, convert it to dollars, and then invest those dollars in US stocks and Treasury bonds. The trade is hugely profitable as the yen falls in value (as it has) and as US stocks rise in value (they have).
The problem happens when the yen starts to move higher – usually as a result of long-term interest rates in Japan moving higher – as they have done recently.
This forces traders to unwind the trade – selling US stocks and bonds and buying back the borrowed yen – to protect their profits or limit their losses.
The yen carry trade has been enormously profitable for months. And, many traders/hedge funds/institutions/banks/etc. are highly leveraged into this trade.
The numbers are difficult to compute, as many institutions don’t declare their exposure to their trades. But, some estimates suggest there could be as much as $14 trillion leveraged into the yen carry trade.
When it comes time to unwind that trade – when the yen starts to rally – everyone is going to run for the exits at the same time.
That is the sort of “Black Swan” event that most folks are probably not prepared for.
Here is a two-year chart of the yen…
The yen peaked last April and has been in a steady decline ever since. Traders who borrowed the yen at higher prices have profited from the decline.
But, declines don’t last forever. And, when the trend changes, traders have to be quick to cover – or else risk watching their profits evaporate.
Over the past two years, we’ve seen two huge rallies in the yen – July through September of 2024, and February through April last year. The rallies started with a spike higher off the lows, and accelerated as the yen crossed above its 50-day moving average line.
For the most part, the yen has traded below its 50-day MA for the past eight months. But look at what happened last Friday.
The yen spiked higher – gaining 1.77% on the day (which is a GIANT move for a currency), and it closed above its 50-day MA.
There’s a good chance the yen has reversed trend and is now headed higher. That means the yen carry trade is likely to unwind over the next several weeks.
The S&P 500 fell 8% as the yen rallied in 2024. The index dropped nearly 20% from February through April last year.
Yes, there were other factors that contributed to those declines – like recession fears in 2025, and tariff policies in 2025. But, that proves my previous point…
Nothing matters until some obscure catalyst occurs. And then… everything matters.
The yen carry trade has started to unwind. It’s going to matter in the weeks ahead.
Best regards and good trading,
Jeff Clark
Editor, Market Minute