Any unwinding of Yen carry-trades was actually prompted by massive losses in US subprime mortgages.
With it making a new multiyear high, Goldenstar (GSS) is doing even better...
So, it remains to be seen how much of the selling over the past week in all markets is actually being driven by Yen movement (and thus a lack of liquidity caused by Yen carry-trades being unwound... or so one theory goes?) and how much of it was simply an "associative assumption" sort of reaction on the part of the hedge fund crowd after they were slammed last week by surprise selling in everything they owned, which appeared to coincide with the yen and Swissie rallying.
Of course, this also brings to mind a famous example of why this sort of associative analysis can sometimes be misleading:
Sales of ice cream rise in the summer, and so do the number of crimes. Therefore, ice cream sales cause crime, right?
Obviously, that's pretty silly. So, it remains to be seen how much the Yen carry-trade has played into the recent across-the-board selloff. We'll know more the first day that the recent relationship (Yen up, everything down and Yen down, everything up) breaks down (which could very well be today).
As I've noted over the past year or so, Yen movement has coincided with zero reaction within the global marketplace, except for last week (see gold run over the yen in the chart below).
For me, the fact that commodities have held up so well in some way debunks the idea that we saw some sort of liquidity event due to the Yen carry-trade being unwound because these commodities should be the most influenced by actual changes in total liquidity. Instead, they actually held up the best, as the CCI is barely even down from its recent all-time high.
The more likely explanation of the chaos over the past week is still centered around the meltdown in the subprime mortgage market. From what I can tell, any unwinding of Yen carry-trades was actually prompted by massive losses in US subprime mortgages, where the market has in essence been vaporized. That vaporization then triggered an unwinding of carries into it, which triggered a rally in the Yen, and so on. But the key is that concern about a hole being blown in the US's credit fabric that actually finally triggered some concern about equities and certain credit instruments over the past week or so. After all, if you begin to cut off credit to the US consumer, you cut off the consumption beast's food source, and that's a big step on the way to a recession.
Since late last week, the majority of the ABX indices have actually been bouncing, so if subprime is the dog and the Yen is the tail, it's the dog that we want to watch… not the tail. And the dog is telling us right now to be prepared for a bounce in equities. If the market believes the Fed is getting closer to easing, it's not a surprise to see these ABX indices bouncing, although I'm not sure an easing on the part of the Fed is going to change much for subprime mortgage-land in the longer-run. It will no doubt buy time though.
For gold, however, it's very bullish...
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