Tag Archives: yen/dollar carry trade

Guest Post: The Mysterious Guardian Of The U.S. Stock Market

Note:  Scott Rabinowitz owns Quarterwave Asset Management LLC and has been a professional investor in the precious metals sector for over 15 years.

Yes, this has all become mentally exhausting for anyone that has been around what are still referred to as “markets for the past 25 years. In fact, I’d say it has become mentally exhausting to anyone still capable of thinking on their own, not having to be spoon fed an explanation for every logical and illogical outcome that seemingly approaches at a more rapid rate as each day passes. To most thinkers, it is frustrating that fundamentals seem to be nothing more than an old pastime to everyone else. Our world has succumbed to an existence in which a mere few can and will dictate their desired outcomes as if it is a certainty and not just an experiment in which unintended consequences are nothing more than a potential nuisance.

So, when nothing makes sense anymore and every day feels like lunch with the Mad Hatter, one must seek out a potential explanation for the confounding behavior of “markets”. After all, fundamentals have clearly been deteriorating for some time now, whether it be corporate revenues (declining), earnings (declining), etc. Yet US equity markets are at all time highs – coated in as much Teflon as the political world. Oddly enough however, precious metals are having a great year despite the pullback in August. It should appear to both the casual and non-casual observer that there must be a conduit, instigator, call it what you will, mechanism, to help explain how “markets” seemingly either abruptly stop going down or up as if was magic.

The mysterious guardian of markets appears to be the USD:JPY (US Dollar:Japanese Yen). It is hard to imagine that the correlation to equity market bottoms and tops is correlated to anything other  than this magic elixir. This also includes the counter movement of precious metals to the USD:JPY as well. What am I saying? When the USD:JPY is rising stocks have been rising in lock step with it while precious metals have experienced the opposite move and vice versa.

Below are the two 4-hour charts (click to enlarge) of the USD:JPY and the S&P 500 back to December 2015 to show how there appears to be a potential mysterious guardian of markets. Furthermore, the takeaway are the dates of the “turns” in the USD:JPY because yes the decline YTD looks to be quite orderly even though the S&P 500 has moved higher.

The reason the USD:JPY appearUSDJPYs to be the chosen guardian of markets is due to the fact that it’s movement determines whether the carry trade (shorting JPY vs. the USD to buy risk assets) is turned on or off. The reason the Fed uses the yen rather than the euro is because the yen is the second most liquid currency in the world and its near-zero cost to SPXborrow efficiently enables the carry-trade mechanism – short/borrow yen and buy dollar fiat currency based assets (stocks, Treasuries). Also the U.S. has a much tighter political policy control grip on Japan than the EU.