Why the Japanese Yen Moves in the US Stock Market: Morning Brief

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Tuesday’s gains left investors with two questions: “Is the selling over?” and “When should I buy?”

Wall Street thinks the worst is over, but to really understand what’s happening, we have to go abroad to Japan to study what’s called Trade bear.

This is because the Japanese yen has found itself closely linked to US technology stocks – which have been fuelling the market this year.

Currencies fluctuate relative to each other based on interest rate differentials, safe haven flows during times of panic, and international trade.

Japan has been mired in a deflationary spiral for decades, from which it is only now emerging, and interest rates have hovered around zero for decades. As the world’s last holdout with negative rates, they only climbed into positive territory this year when they rose to 0.1% in March — and then again last week to 0.25%.

Meanwhile, interest rates in the United States have remained above 5% for a year, while the European Central Bank has held steady at below 4%, after cutting them in June.

Out of this gaping hole, a whole cottage industry has sprung up of investors who borrow cheaply in Japan and then reinvest in higher-yielding assets elsewhere. It’s called the carry trade.

Ed Yardeni, President of Yardeni Research, joined Yahoo Finance’s Morning Summary to explain the details.

“[A] “A lot of speculators went and borrowed in Japan at zero interest rates,” said Yardeni, who explained that the borrowed yen was then converted into dollars and other currencies.

“The yen weakened, the dollar rose, and they took that money and invested it in assets around the world,” he added.

Since 2010, persistent selling pressure on the yen, combined with a corresponding supply on the US dollar, has caused the dollar to be twice as valuable as the yen – a very big move for a developed world currency.

The yen’s collapse has even prompted the Bank of Japan to intervene at times, but ultra-low interest rates encourage capital flight. Now that the Bank of Japan has raised rates, the drivers have reversed, with international money flowing back into the yen.

Leverage and volatility act like masochistic brothers, feeding off each other in times of conflict – wiping out hierarchical positions. Moves that would normally take months happen in a matter of days.

Markets weathered the first round of margin calls on Monday and Tuesday, but bear markets don’t happen overnight. When looking for clues about future direction, investors should also consider the backdrop in U.S. markets.

In the latter half of July, investor portfolios were already experiencing a worrying rotation from large-caps to small-caps and value sectors.

Add to that some recession fears fueled by weak US economic figures and the Fed chairman holding his index finger to the “cut” button, and investors themselves were quick to hit the “sell” button.

Wall Street is leaning toward a fairly quick resolution to this incident. Morgan Stanley Sales Office Books for clients“We are closer to the end of the sell-off than the beginning,” said Arindam Sandilya, co-head of FX strategy at JPMorgan. Believes We are making 50% to 60% off through the sale starting Monday.

For his part, Yardeni sees the end a little sooner: “The relaxation period should be over by the end of the week.”