There are two charts above, the S&P 500 and the Japanese Yen continuous contract. The highlighted areas show the days that the S&P 500 got into trouble on yen carry trade concerns. The first day, February 27 2007, yen broke out from a quadruple bottom formation and the second day , March 13, yen held the breakout line and rallied strongly. Both of those days were painful for the S&P 500, with big down moves.
The past few days, yen has declined back to the break out line and it seems that is finding support again. The probability of the yen spiking up again increases as this line holds. I think we are at a very important juncture here as the S&P 500 tests the highs of the year and as the yen tests the support line. If the yen somehow manages to fail below support and sell off then the yen carry trade is alive and odds favor a break out on the S&P 500. If the yen holds support and rallies then watch out for trouble on the S&P 500, since the yen carry trade concerns will reappear.
2 comments:
The obvious factor is whether any Japanese economic reports show strength which would signal another interest rate rise from the BOJ. At some point this year it might happen and there will be an aftershock for many days in the currency and equity markets.
Strength in Japanese economy is inevitable and it has started already from a year ago with real estate prices increasing and credit expanding after 13 year of contraction.
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