The Monday State of Play: The Yen Threw a Punch. Nobody Flinched.
Japan’s currency problem is also a global liquidity story, and this week could tell us how stable the funding beneath US markets really is.
Happy Monday, everyone! Now I know what you’re thinking, “what the heck does the yen have to do with me?” and i totally understand that. The yen usually isn’t the first thing a US investor checks before the opening bell, but right now it deserves a spot near the top of the screen.
For years, investors have borrowed money cheaply in Japan, converted that money into dollars and used it to buy US stocks, bonds, credit, cryptocurrencies and other risk assets. As long as Japanese rates remain low and the yen remains weak, that trade works and quietly adds liquidity to global markets.
Now the problem comes when the yen suddenly strengthens. Investors may be forced to sell the assets they bought and purchase yen to repay what they borrowed, which means a currency move in Tokyo can quickly become forced selling in New York.
This is why what’s happening now matters to us.
let’s picture a boxer who spends months in training camp, finally steps into the ring, lands a clean right hand and boom, the other guy just blinks. That’s what is going on with the Yen.
The Bank of Japan (BOJ) raised its policy rate to 1% in June, the highest level since 1995, yet the yen still fell to its weakest level since 1986. USD/JPY traded around 163.7 on Monday, while Japan’s repeated warnings about intervention have produced plenty of headlines and very little lasting support for the currency.
The easy conclusion is that Japan raised rates and the market ignored it, but that’s not the whole lesson.
One percent sounds restrictive only when compared with Japan’s own history. The Federal Reserve (FED) is still holding rates at 3.50% to 3.75%, which means investors continue to have an incentive to borrow cheaply in yen and move that money into higher yielding dollar assets. Japanese fiscal policy also remains loose, while doubts continue to grow over how much additional tightening the government and economy can tolerate.
So heading into this week’s BOJ meeting, can Governor Ueda convince markets that 1% is another step in a longer normalization process rather than the end of it?
A slow stabilization of the yen would probably be healthy. A violent move in either direction could tighten liquidity, increase volatility and reach some of the most crowded parts of the US market.
The yen is showing us where a good hunk of the global leverage is funded, and why we should care if that funding becomes less dependable.
Global Macro: Two Central Banks and One Very Busy Thursday
Federal Reserve (Wednesday). The Fed is expected to hold, but the meeting is still live enough that Kevin Warsh’s press conference will matter more than the statement. Investors want to know whether another hike is coming or whether cheaper oil has bought the Fed more time.
Core PCE and second quarter GDP (Thursday). Growth and inflation arrive together Thursday morning, giving us the cleanest test of the reflationary expansion case. Resilient growth with cooler inflation would be the best outcome. Weak growth and sticky inflation would be the worst.
Bank of Japan (Thursday and Friday). The BOJ is expected to leave rates at 1%, but markets will be listening for signs that another increase could come later this year. A credible tightening path could stabilize the yen, while another cautious message may invite further weakness.
Oil. Brent and WTI fell sharply after the United States and Iran paused their attacks, easing some pressure on inflation, yields and the consumer.
Earnings: Spending Is No Longer Enough
Four members of the Magnificent Seven report this week, and after Alphabet’s capex driven wobble, the market wants more than another large spending plan. Investors now want proof that AI investment is producing revenue, productivity and returns.
Microsoft and Meta (Wednesday after the close). Microsoft will be judged on Azure growth and AI demand, while Meta needs to show that its enormous capital budget is improving advertising results and operating leverage.
Qualcomm and Arm (Wednesday after the close). These reports offer a useful look beyond the AI server trade. Qualcomm covers smartphones, automobiles and edge computing, and Arm gives a broader read across cloud, mobile and embedded markets.
Apple and Amazon (Thursday after the close). Apple needs to show that on device AI can create a meaningful upgrade cycle, while Amazon must prove that AWS growth is keeping pace with its massive infrastructure spending.
The real economy check. Coca Cola, Boeing, Ford and Procter & Gamble will help tell us whether economic strength is broadening beyond technology spending and higher income consumers.
Fintech and animal spirits. SoFi, Robinhood and Coinbase will provide a read on credit demand, retail trading, cryptocurrency activity and the return of financial market speculation.
Where Does This Leave Us?
So this week is really about two forms of credibility.
First, the Bank of Japan needs to convince markets that 1% isn’t the final shot, while the Federal Reserve needs to explain whether it’s comfortable holding rates steady or simply waiting for more evidence before tightening again.
And at the same time, Microsoft, Meta, Amazon and Apple need to prove that the AI capital cycle is producing enough revenue and operating leverage to justify spending that has become just about unbelievable.
I’m not saying the bull run is over, but I am saying the market is getting more selective and more rotational.
Cheaper oil would give us some breathing room. Economic growth still appears resilient and corporate earnings remain healthy. But even so, the days when every dollar of AI spending automatically earned a higher valuation may be behind us. Spending now has to produce visible returns, earnings have to do more than simply beat expectations and central banks have to convince investors that their policies can still change behavior.
Nobody needs to suddenly become a currency trader over this. The yen has just become another pressure gauge for global liquidity. A slow stabilization would be manageable and probably healthy. A sudden rally could force investors to unwind leveraged positions, while continued weakness could eventually push Japan toward more aggressive intervention.
Either way, USD/JPY deserves to sit next to the 10 year Treasury yield and the Nasdaq on our screens this week.
Luke Perry
Portfolio Manager, Whalen Financial