Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Friday, April 06, 2007

Tight Correlation Between Dollar/Yen and Major US Indices

The chart below tells the story:
1. Borrow Yen
2. Buy Dollars
3. Prop up the major US indices.

There wasn't a strong correlation until the subprime market started getting ugly in mid-February. Since then the financial markets have been miraculously saved by an inflow of new money via the yen carry trade. Whenever the Yen has been down or falling the US markets have rallied.

This pattern started with a sharp sell-off in the mortgage bond markets. For a time it appeared that certain yield chaising strategies were blowing up. However, rallies in the Yen likely saved many players for the time being. It has appeared to me that most of the Yen selling has been taking place during US trading hours. My hunch is that the Yen carry trade has become far more leveraged in recent weeks with an even greater systemic risk now in place if it unwinds forcibly.

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