It was August 2nd at the beach on a family vacation. I woke up around 4 a.m.
and as always the first thing I do is check the overnight futures quotes. S & P down 5.50% here, headlines of a Nikkei crash, and another great Yen carry unwind happening.
As calmly as I could I kissed the wife and kids goodbye and jumped in the car to get back to my trading desk as quickly as I could. I've seen this movie before. I traded for a hedge fund and served as senior technical analyst for an foreign exchange company during the great financial crisis of 2008 that saw a severe yen carry unwind.
As soon as I got home I looked at the so-called "yen crosses" to see how far they've come compared to 2008. I looked at the Nikkei that was reportedly down 12% intra-day, the worst decline since 1987. Here is that chart: To handicap this chart for you, here's a trick I used when I was starting out.
The blue line is USD/JPY and if the line is going up, the first part of the pair is strengthening relative to the second part. So with the blue line moving up USD is strengthening relative to yen. If the line is headed south the dollar is weakening relative to the yen, and the yen is strengthening relative to the dollar.
If you look at the severity of the 2008 decline in the USD/JPY exchange rate compared to now, it's not even in the same ballpark. In fact, just two months ago many were complaining that the yen was too weak and claiming a crisis is near when the rate was 165. Now, with the decline and USD/JPY at 145, many are claiming another crisis is upon us with a yen that is too strong and the carry trade is unwinding.
Looking at charts can provide so much context. I believe that the July 11th CPI print that came 0.1% below expectations was the culprit to this whole yen carry unwind.
Markets decided at that point that the Fed was likely to cut rates at the September meeting and that was all the catalyst required for those borrowing yen cheaply and investing overseas in higher yielding and earning markets, like U.S. tech stocks, to begin to unwind the trade.
Could this yen carry unwind move further? If U.S. 10 year yields continue to move below 3.
50% then I believe yes, it could. But I don't think that's going to happen and yields, the and broader stock market is carving out a reliable support zone. The Nasdaq 100 ETF 'QQQ' is pulling back into a zone of price support from 3 sources; 200-day moving average, parallel channel support, as well as the former 2021 highs of $410 that were broken now acting as support.
I continue to be bullish on the stock market led by the AI revolution. If we stay above that $410 level after Nvidia earnings on Aug 28th I just might look back and think I probably should have stayed at the beach. -Todd Gordon, Founder of Inside Edge Capital, LLC DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium.
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