Market volatility has finally started to calm down somewhat, although the VIX is still hovering around 30. With equity prices and bond yields still experiencing larger daily moves, there’s a good chance that this market is still controlled by volatility and we have yet to establish the next trend.
There are a couple of things that I’m still watching here - gold and the yen. I think they’re both interrelated right now and perhaps not for good reasons.
First, let’s talk about the yen.
If you’ve been a subscriber here, you know that I believe the yen is going to be key to where the market heads next. We saw why it was important back in August & September of last year and I think we’re reaching that point again.
Last summer, the market was expecting a prolonged rate cutting cycle from the Fed. Once the Bank of Japan surprised the market with a rate hike in July, it ignited a sharp rally in the yen that ushered in the first wave of the reverse carry trade. Traders who had been feasting on cheap borrowing that they could take and put into higher yielding assets (for example, the magnificent 7 stocks) were suddenly closing out those short positions in order to avoid getting upside down in those trades.
I say the “first wave” because I firmly believe that the reverse yen carry trade isn’t done. In fact, the market may be at a critical tipping point right now if the yen strengthens any further.
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