Safevalue Capital - Blog Details

2025-03-13 05:13 AM

U.S. Dollar, USD/JPY: Are Yen Carry Unwind Fears Driving the Global Sell-Off?

Depending on how the rest of this week goes, we could all be looking at a far different reality from last week.

To be sure the DeepSeek announcement was already there but it was this weekend when fears began to circulate on social media that China has just developed at LLM at a far lower cost with significantly less capex, to the point that it made efforts in America look like a giant waste of capital. And given the gap-higher in stocks from last week’s ‘Stargate’ announcement, when Masayoshi Son of Softbank pledged a whopping $500 billion from a host of different companies, this highlights a major pressure point for global macro markets.

But there’s more to it than just that…

It was last December 18^th at the FOMC rate decision that stocks started their last notable pullback. At that meeting, the Fed came off as less-dovish than they had for most of the prior year, when they were priming markets for rate cuts that arrived in September. But, as those rate cuts arrived so did higher long-term Treasury rates, pretty much the opposite of what they probably expected. And that was likely being pushed by higher inflation expectations which, again, for a central bank that’s starting a rate cut regime, that’s a large indication that they may have just gotten it wrong.

That sell-off from the December FOMC meeting largely lasted until the Monday before last, when the election gap in the S&P 500 finally was filled and at that point, stocks began to jump-higher. This was further pushed-higher by the release of PPI, which was well-below expectations and then CPI, which was in-line for headline by below expected for Core. The next week then saw another jump, with major moves on the back of the inauguration on Monday (which led to a gap-higher on Tuesday) and then the Stargate announcement last Tuesday afternoon (which led to a gap on Wednesday).

That election gap, by the way, was the first zone of support I had looked at for the 2025 Forecast in Equities, as well as the ‘s1’ zone from my top trade idea for this year. You can access the full forecast from the below link:

Collectively, the risk trade in the U.S. had put in a massive push in a rather short period of time, and it was easy to get lost in the shuffle the fact that the FOMC meeting from a month prior had seen the bank sound as hawkish as they had in over a year.

I think this played into the pullback that we saw across U.S. equity indices on Friday and, likely, it’s played into the pullback to start this week.

So, FOMC on Wednesday will obviously be a big deal and the sell-off that we saw in stocks, paradoxically, may help to soften the blow from that, as Powell is unlikely to sound aggressively hawkish if stocks are on their back foot and threatening a larger sell-off, at least in my opinion. But outside of the Fed’s control is the Friday Core PCE data which is expected to edge-higher on a month-over-month basis, to 0.2% from last month’s 0.1%, while year-over-year remains at 2.8%.

Collectively, a less-dovish Powell and a slight bump-higher for inflation could be supportive of the U.S. Dollar, but there’s another notable factor here that could be pulling at stocks, and that’s something that we saw show up last summer.

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