Watching the Yen

A long time poster on the TIE InvestorVillage Message Board with the call sign of Aerocom21 (http://www.investorvillage.com/smbd.asp?mb=399&mn=28726&pt=msg&mid=3231675) called out a very interesting indicator that I thought was worth looking at. He is tracking the value of the Yen to the market and looking for occasions where an “up” Yen indicates a down US stock market.

We all know about the Yen Carry Trade which is part of a broader trading strategy where a trader sells a certain currency with a relatively low interest rate (in the case the BOJ has rates held at something like 0.50%) and uses the funds to purchase a different currency yielding a higher interest rate (the current US Fed Funds rate is $4.75%). A trader using this strategy attempts to capture the difference between the rates (which can often be substantial, depending on the amount of leverage the trader chooses to use).

The theory goes that when the market sells off, nervous investors flock to safe investments, such as the US Dollar, putting pressure on the Japanese Yen and the "Carry" traders, potentially causing them to unwind positions (like what happened in February and again in August). But which comes first; the chicken or the egg? Well, it is still unclear to me, but it is certain that there is good recent correlation between the market and the Yen with a rising yen reflecting a sliding stock market (with the 50-day MA marking important tops and bottoms).

Here is a recent chart against the SPX (note the 50-day inflection points):



On the two market tops identified with circles, note that this indicator was off by one day in either direction, suggesting to me that one may predict another (direct correlation), but Japan being on the other side of the world means that the news truly does take a day to follow through in multiple markets.

A rising yen is yet another chart worth watching. I am sure a lot of traders are also watching this one.