Image Source: PixabayMARKETSAnother day, another record high for US stocks. Jerome Powell’s latest remarks to Congress did little to shake investors’ belief that the Federal Reserve is inching closer to pulling the rate cut lever this year. Powell carefully avoided pinning himself to a specific rate-cut timeline ever the cautious maestro. However, for market participants, the chorus of weaker economic data sings louder than his measured words, harmonizing into a likely September rate cut followed by a potential holiday treat in December (or maybe even November).Despite Powell’s rhetoric laying the groundwork for a rate cut later this year, those hoping for a tradable event were disappointed. A glance at the currency and gold markets, which remained stubbornly unreactive (with the dollar even showing a bit of muscle), indicates little to glean from his remarks. Powell continues to dance around two-way risk, insisting on more data before committing to a rate cut.The Fed finds solace in the recent inflation reports, which likely reassure most Committee members that the hot data from January, February, and March were merely glitches. They’ll downplay disinflation evidence publicly until it’s undeniably “clear as day”, especially after the Waller Pivot blunder last November.The game plan? Probably a move in September. They’re hoping the June and July inflation figures will back up the April and May data, giving them the green light when the September Summary of Economic Projections (SEP) refresh could hint at a pair of cuts for the year.On Tuesday, Powell underscored the now-familiar notion that the balance of risks is more symmetric. “In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he said.Translation: The Fed is no longer operating with a single mandate. While Powell wouldn’t spell it out, in the event of a negative Non-Farm Payroll (NFP) print, the Fed will cut rates at the first opportunity – which is to say, at the very next meeting.So, while Powell keeps his cards close to his chest, the market continues to read between the lines, betting on a future where the Fed finally makes its move.FOREXThe euro is in a holding pattern, awaiting cues from the ongoing French coalition talks. Potential outcomes range from a left-wing government to a market-friendly technocratic prime minister. Meanwhile, FX volatility has been taking a nap, but perhaps CPI could jolt it awake on Thursday, although I’m not holding my breath.Thursday’s CPI data could be crucial in determining whether the probability of a September rate cut increases further from the current 70%. However, with two more payrolls and three CPI reports due before the September FOMC meeting, traders will likely avoid heavy short dollar positions until the Fed waves all green on the rate cut flags. Still, the spectre of Trump’s trade policies, viewed by FX traders through an inflationary lens, does suggest fewer Fed cuts in 2025, which is dollar-supportive.As I advised my FX trading colleagues yesterday morning, it might be more strategic to play the “rate cut fever” via gold rather than currency markets. After all, even FX magicians need different tricks up their sleeves!In particular, shorting USD/JPY seems increasingly challenging due to entrenched carry trades. Even with two expected rate cuts from the Fed in 2024, the differential remains substantial.For the yen to strengthen significantly, we believe it would require a combination of a Bank of Japan (BoJ) rate hike, an elevated level of quantitative tightening (QT), and perhaps the Government Pension Investment Fund (GPIF) starting to repatriate funds to Japan. Until such factors come into play, dislodging carry trades in USD/JPY will be as challenging as getting a cat to bathe.Tokyo Traders Eye Yen Assets: A Whale of a Shift LoomsRumours are swirling that Tokyo desks are gearing up to redirect some government-controlled dollars back into yen assets. Given the hefty sums involved, this move could send ripples through global financial markets.Enter the Government Pension Investment Fund (GPIF), the investing leviathan with a staggering ¥246 trillion (around $1.53 trillion) in assets as of March 31. Half this total is parked in foreign stocks and bonds, mostly in dollars. The GPIF is about to embark on a once-every-five-year review of its investment strategy. Should the fund shift just 10% of its assets from foreign currencies into yen, we’d be looking at a colossal $150 billion move.While this alone might not be enough to reverse the yen’s recent year-long decline, when combined with a Bank of Japan (BoJ) rate hike, a significant reduction in daily bond purchases, and potential Fed rate cuts that could bring 10-year US yields below 4%, we could see USD/JPY hitting 150.At a news conference last Friday, GPIF President Masataka Miyazono declined to discuss potential portfolio changes for next year. Still, he mentioned that the fund would analyze the expected long-term returns of each asset class.“The yen depreciated against the dollar and euro in the previous fiscal year, which had positive effects on our investment performance,” Miyazono noted, adding that the fund wasn’t intentionally exploiting the weak yen to boost returns. (A nice bit of diplomatic smoke signalling there!)The new strategy will officially take effect next April. Savvy traders know the GPIF will likely start making these adjustments quietly to avoid spooking the market and causing a USD/JPY crash. But as soon as the first GPIF order hits the market, brace yourself for a USD/JPY rollercoaster.So, as the GPIF gears up for its strategic overhaul, market watchers are poised for what could be a significant shift in the global financial landscape. Hold onto your hats because this whale of a fund will make some waves.More By This Author:FOREX: The EURO Is Stuck In A Political Holding Pattern
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