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Monday, November 12, 2007


the yen rears its ugly head

one of the themes of this blog's discussion of finance has been the carry trade -- that is, the ability of global financiers to borrow at very low rates in japan and invest across currencies at very high rates, collecting the rate differential for so long as currency exchange rates remain stable.

that last bit -- "for so long as currency exchange rates remain stable" -- is the key caveat, as sudden currency moves can wipe out years of returns and force unwinds that perpetuate the disastrous currency move. many are watching for signs of strength in the japanese yen as a proxy for increased risk aversion on the part of carry traders and the potential beginning of a massive global deleveraging.

greg weldon at minyanville visits the topic:

Evidence the pair of charts on display below plotting the Eurocurrency versus the Japanese Yen. These charts reveal key technical pivot points, and the eye-opening ‘tightness’ in the positive correlation between this FX cross, and the US equity market, as it relates to the top-down macro-monetary ‘reflation-deflation-balance.’

EUR-JPY violated the 100-Day EXP-MA, on the back of a negative MACD pattern and double-top pattern. A push below the most recent downside pivot point at 160.50 yen per euro constitutes a significant break, and would put the summer lows ‘into play’, just below 150.00.

A move to 150 by the yen against the euro would bode ill for ‘reflated asset prices’, since an appreciation in the Japanese currency would imply more ‘tightening’ in global credit conditions, amid capital repatriation.

Indeed, the US equity market might be particularly ‘exposed’, with the August lows coming into view for the bears. Naturally, a violation of those lows, in the context of an intensified rally in the JPY would imply a significant worsening in the current ‘credit crunch’.

this is the link to the euro:yen at

similar patterns are present against other popular carry trade object currencies, such as the australian dollar and new zealand dollar.

today the yen broke key resistance against the us dollar at 112 yen, and has traded as strongly as 109 yen to the dollar. since june, the yen has strengthened by 22% against the buck.

UPDATE: how big a deal is it? how large is the carry trade? note this from ken fisher via ft: the yen is acutely correlated to stock index prices worldwide.

On days when the euro rises against the yen, stocks rise. On days when the yen rises to the euro, stocks fall. This year’s daily yen/euro changes perfectly track this summer’s stock market correction and subsequent resurrection. Make a chart of stocks, then the yen/euro spread; slip one on top of the other, and they are virtually indistinguishable.

the conclusion is that yen borrowing and little else is driving the bull market in equities, and has been since 2006.

With the correlation this high, do not fear a weak dollar; fear a strong yen. Any material sign of BoJ tightening would be very bearish.

there is a truly massive deleveraging in the wings, if it ever begins to accumulate momentum.

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