Then You've Already Lost

"If you must resort to violence, then you've already lost." -John Connor (Sean Connery), Rising Sun (1993). 

Don't look now, but the Japanese Yen currency is strengthening again. 

As we saw (briefly) in early-August, when the Yen moves higher it pressures the much-ballyhooed "Yen carry trade," where speculators have cheaply borrowed the Yen, en masse, and in turn gone around the world to splash around in various high beta trades, be it short volatility, long AI, long the Magnificent 7 names, even long Costco. A stronger Yen threatens to unravel that trade, which has been popular for decades now. What likely happened last month was that the move was ephemeral and did not stick, especially when the powers that be in Japan quickly blinked and hinted that future rate hikes (which strengthen the Yen currency) may not be in the cards. 

On the updated Dollar/Yen cross daily chart, below, with the Yen being the denominator we can see the strong Yen pushing the chart lower as we speak today. The bounce since early last month has been far less impressive than the rallies on the senior indices in stocks, for example, marking a notable negative divergence we have been tracking both here and with Members. 

Should this bearish consolidation on this chart resolve lower which, again, sees a stronger Yen, you can bet the Bank of Japan and other figures in the land of the rising sun will quickly blink again and begin to intervene or do whatever they can to reverse the this trend. 

However, at a certain point markets seem to be losing confidence in the BoJ, as inflation remains a glaring issue in Japan, meaning rates should be higher. And given the apparent bear market rally in the Dollar/Yen which looks to have concluded, the BoJ may have already lost, which means volatility should be higher and stocks should be lower as another round of the Yen carry trade unwind awaits.