The U.S. Federal Reserve's dual mandate is to maximize
employment and combat inflation, nothing else right? Well, if
Japan's central bank and monetary policy is any sign, the Reserve
banks of the world also likely control the equity markets too,
unintended consequences or not.
The chart below is all I need to see to realize that indeed the
world's banks' easing and currency policies directly affect
equity markets. This chart adds empirical data where most
already have assumptions and gut feelings of a Fed driving equity
markets, just this one is occurring on the other side of the
isn't as Diversified as You Think
Yen Carry Trade
The Yen (NYSEARCA:FXY) carry trade was a popular vehicle for
profits by the big banks in the mid-2000's. A carry is when
an investor borrows at a low interest rate in one country (Japan
for instance) and then buys a strong currency or asset in another
country such as the United States (NYSEARCA:VNQ) or Europe
(NYSEARCA:VGK) that has a higher interest rate. The investor
collects the interest and may even pocket currency gains.
Right now the Yen Carry trade is back in full effect as the Yen
falls and markets in countries with higher interest rates around
the world climb.
A recent media report titled, "Yen Carry Gauge is at 2008 highs"
showed similar findings. In that article they claim that,
"foreign banks' lending in Japan to their main offices, an
indicator of demand for the Yen to fund purchases of higher
yielding assets, climbed for a fourth month in November 2013 to 8.3
trillion Yen ($79.5B), the most since December 2008".
Investors are using the Bank of Japan's easy money policies to
borrow (sell) Yen and buy assets around the world that provide
higher returns. The chart below shows the extremely high
correlation between the Japanese Yen and the Japanese equity market
(NYSEARCA:EWJ) and proves that a weaker Yen is driving equity
markets. One of the lines is the Yen (rising=weakening) and
the other is of the Japanese stock market.
Investors are borrowing Yen and purchasing stocks around the
The Yen Drives the World Right Now
In a recent ETFguide.com Technical Forecast provided to
subscribers, I showed the extremely high correlation doesn't stop
at the Japanese stock market, but also is very present in U.S.
equity markets as well. The U.S. stock market performs nearly
opposite the Japanese Yen.
So long as the Yen weakens, U.S. stocks will continue to
Since February, the Yen (NYSEARCA:YCS) has weakened 2% while the
U.S. equity market (NYSEARCA:SSO) has gained. This works on a
long term basis but also on a daily basis as pretty much every day
the Yen weakens the equity markets around the world are up.
This even often works on a minute by minute basis.
On Monday's (3/3) big equity market decline, the Yen had already
strengthened Sunday night, sending the futures markets down
overnight. On Tuesday's huge market recovery, the Yen
weakened (NYSEARCA:YCL) substantially overnight so by the time the
U.S. markets opened, they played catch up by rallying. On
Wednesday's flat market day, the Yen too was flat. On
Thursday's muted rally, the Yen had already weakened substantially
overnight. If the Yen weakens what do you think will happen
to the world's equity markets?
The Yen is driving all the major equity markets around the world
and is likely one reason we see such high correlations amongst most
To be an equity bear you need to be bullish the Yen. In a
recent update for our subscribers I explained why I am more bullish
the Yen than bearish and thus as a result they should expect an
equity market selloff with a Yen that should strengthen through
In order to be bullish equities, you therefore must assume the
Yen will continue to weaken. It also assumes, amongst other things,
the Yen will slide further, after an already 30% decline in value
from its 2011 stronghold. That scenario seems less likely to
Profit Strategy Newsletter
utilizes technical, sentiment, and fundamental analysis to let you
know what is really going on in the markets. This past week's
market movements were as much (if not more) about the currency
markets than they were about the escalation of potential war in
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