Do not worry; I will not make this a habit. And I certainly will not talk about “head and shoulders patterns” or “Elliott waves” or any such bollocks.
If the only market indicator you watch is the Dow, you might not think very much is happening… But some strange things seem to be afoot.
First, the dollar had a rough week, with the yen reaching heights not seen since the start of the year:
Last winter, USD/JPY breaching 90 was one sign of the Apocalypse, since it indicated massive unwinds in carry trades. (Or as I liked to put it, “Sayonara!”).
Over at Across the Curve, Jansen has re-posted somebody’s analysis:
In the last three weeks, Usd/Jpy and risk correlation has broken down. Usd/Jpy typically trades w/a 60/70% correlation w/equities, but in the last three weeks the correlation has broken down, now only 30% correlated.
That is, the Yen has gained big but the stock market has not tanked like you might expect.
One explanation for the correlation breakdown is that 3mth USD LIBOR is now LOWER 3mth JPY LIBOR. This spread turned negative about three weeks ago, and in the same timeframe, Usd/Jpy has also fallen 2.9% (see chart attached). Bottom line, the USD is soon becoming the new global funding currency, taking over JPYâ€™s role.
In other words, it is now cheaper to borrow in dollars than in Yen, so the dollar is becoming the new currency of choice for the carry trade. Isn’t that grand?
The Japanese have maintained a weak currency and low interest rates since 1990 or so. I wonder what happens, exactly, if we attempt a re-run of 1990s Japan using the world’s reserve currency? (As an aside, Japanese equities have not exactly been a good investment during this period.)
It is hard not to notice gold closing the week above $1000:
So is this an inflation trade? 2-year swaps suggest not; they have barely budged:
And the 10-year Treasury yield is only 3.34% despite the flood of supply, including $20 billion in issuance this week. In fact, that auction went very well. Somebody out there really likes Treasuries.
Finally, my favorite chart of the week, natural gas:
That’s right, natural gas prices spiked 20% in a few hours on Thursday, then fell 10% in a few hours on Friday. Clearly a highly efficient market at work.
So there you have it. As near as I can tell, the market is now pricing in a re-run of 1990s Japan for the United States. (This week, anyway.) Wouldn’t that be fun?