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Investors are obsessing over the SpaceX IPO. They’re rushing back into everything related to artificial intelligence. They’re playing the “momentum” game and cheering as technology stocks reach valuation levels never seen before.
Meanwhile, the biggest trade on the planet is about to unwind.
Yesterday, the Bank of Japan raised its key interest rate 25 basis points to 1%. This is the highest level since 1995. This is a BIG deal. And, it is definitely NOT bullish for US stocks.
Let me explain…
Higher interest rates in Japan should strengthen the yen. And, that will make it more expensive for folks holding the “yen carry trade.”
The yen carry trade is currently the LARGEST trade on the planet. Hedge funds, family offices, and other institutional traders borrow cheap yen at low interest rates, and then invest the proceeds into everything else – like tech stocks, and all other momentum fueled assets.
The trade works wonderfully when the yen declines and everything else rallies.
But, when the yen rallies the carry trade goes into reverse. Profits can turn into losses, as traders start to unwind their positions – selling off the momentum fueled assets and buying the yen.
We got a glimpse of that unwinding action in July/August of 2024 when the yen rallied 10% in about three weeks. The NASDAQ 100 (QQQ) fell 12% during that time frame.
Look at this two-year chart of the yen…
The yen has been in a steady decline since it peaked in April 2025 – at the same time US stocks bottomed. So, you can see the inverse correlation between the yen and our stock market.
The yen closed yesterday at about the same level it was trading in July 2024. It’s no surprise US stocks are trading near all time highs.
But, if the Bank of Japan is in a tightening mode, then the yen is likely headed higher in the coming days/weeks. And, that could have bearish implications on risk-assets here in the U.S.
Of course, it’s hard to battle the enthusiastic environment of the stock market. It’s a lot more fun to bet alongside the hot dice shooter at the craps table.
But, keep an eye on the yen. If it starts to rally, it will be troublesome for stocks.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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