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Investors have just received the latest quarterly GDP update, and it’s a win for the U.S. economy, showing it’s still in the fast lane. Growth jumped to a 2.8% rate, easily surpassing the 2.1% forecast that economists were expecting. But, as with any GDP figure, it’s like reading yesterday’s newspaper—more historical record than crystal ball for future Fed moves.

However, the late session selloff in the world’s largest technology companies has again pulled the stock market lower, overshadowing economic data that had previously bolstered investor confidence in the Federal Reserve's ability to engineer a soft landing. It seems the tech giants cast a pall over any economic optimism, making the market's path forward a bit cloudier.

Despite investors' valiant attempts to hit the "pause" button on mega-cap tech de-risking during the New York trading session, prominent sellers continued to trim their holdings in some of 2024’s standout technology stocks at every rally. This suggests the tech sell-off might be more than just a fleeting blip on the radar.

Stocks have ventured into choppier waters following a record-breaking rally. Disappointing earnings reports from Tesla (TSLA) and Alphabet (GOOGL) have overshadowed what was once an AI-fueled euphoria. As investors continue to shimmy and rotate to the small-cap dance floor, the spotlight has turned, perhaps overly harshly, on once-celebrated tech stocks.

FOREX

This week, unwinding the Yen shorts via the carry trade added some spice to the global risk-off cocktail. With plenty of unwinding still on the table, it’s bound to be a frantic state of affairs from here through the 2024 Fed easing cycle. So, as the US Treasury curve steepens, global markets will continue to adjust and readjust to the next phase of the policy cycle.

We had initially thought there was room for the Yen to rally this week based on markets' speculation, such as a modest rate hike by the BoJ, a steady reduction in bond buying, and a Fed rate hike in September. Where beyond 152-153 USDPY, sustaining a yen rally could be as challenging as convincing a cat to take a bath—unless we witness a significant global risk-off event or, as suggested by yesterday’s price action, a more hawkish-than-expected hint from BoJ insiders.

Tokyo forex desks have yet to offer any hawkish whispers, and the short-term momentum pendulum has swung in favour of the dollar, with USDJPY back trading near 154. This upshift gained traction after a strong US GDP report, leaving US recession spotters scratching their heads again.

A dated Reuters poll shows that three-quarters of economists expect the Bank of Japan to remain steady this month, with potential movement in September or October. However, the outcome of the July 30-31 meeting remains shrouded in uncertainty. Given the government pressure on the BoJ to hike to strengthen the yen, I'm not sure how much that poll is worth.

USD/JPY has corrected by 6% from its recent peak—a textbook example of a successful intervention by Japanese authorities. It wasn’t about the sheer volume of FX sales but the impeccable timing. Think of it as the market’s equivalent of a perfectly executed plot twist—Japan’s FX intervention cleverly aligned itself with a dovish Fed policy shift and sold dollars when the Yen was trading on the front foot!!

The debate continues about what’s driving the USD/JPY correction—intervention, US rates, a tech stock stumble, speculative whispers about a weaker dollar under a Trump administration, or the government’s newfound yen-supporting zeal. The extreme positioning is at the core: speculative short yen futures have hit levels not seen in two decades, leaving ample room for further unwinding. For yen bears, the good news is the pullback to 154 if they are keen to reenter, but the bad news is there’s no immediate US recession on the horizon. So, as the market navigates these choppy waters, keep your eyes peeled for more twists and turns!

Nonetheless, it’s been an excellent trading week on the long Yen equation.

Summing it all up, recent developments have leaned towards a stronger JPY, with the pair potentially topping out. Are we at the turning point? Perhaps, but there are still two-way risks. Recent JPY gains could quickly reverse if the BoJ disappoints expectations for tighter policy at month’s end, pushing USD/JPY back towards 160.00. Conversely, if the BoJ tightens, a deeper correction could see the pair falling to 152-153 support levels. FYI, the 200-day moving AVG is around 151.50. Hence, we think that is a massive stop-loss level and trigger. If the stop-loss domino effect kicks in, we could see USD/JPY dipping below 150, especially in a scenario where the Fed signals they will cut rates three times in 2024, the BoJ adopts more aggressive policies, and broader market de-risking occurs. However, this would require a perfect alignment of several factors. An outsized hike by the BoJ might be enough to rock the boat with the market breaking bad.

My July 20 note Re: A Turning Point For The Yen

As we edge closer to the market's traditional dog days of summer, typically associated with August, it seems people need a break—not just from the markets but also from the Washington political circus and the US media’s somewhat comical portrayal of Kamala Harris as both a moderate liberal and the next great savior.

Honestly, it's shaping up to be a perfect time to tune out after next week's Bank of Japan meeting. I’m supposed to be on summer hiatus, but it's hard to unplug fully with the markets still making moves. But as predictably as the sun rises on a Monday, come August, it’s time for a well-deserved pause.

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