JAPANESE YEN IS EMERGING AS ONE OF WORLD'S STRONGEST CURRENCIES -- THAT SUGGESTS FURTHER UNWINDING OF THE YEN CARRY TRADE AND IS HURTING GLOBAL STOCK MARKETS

YEN MAY BE NEARING HUGE BULLISH BREAKOUT... One of the day's headlines is the Japanese yen hitting a new three-year high against the U.S. Dollar. Last summer, I started reporting on the emerging new uptrend in the Japanese currency. That uptrend may be about to get a giant boost. The reason why is shown in Chart 1 which plots monthly bars for the yen (against the dollar) since 1994. The chart shows the yen moving up to the top of a huge "ascending triangle" that's been in effect for ten years. [An ascending triangle is identified by a rising lower line and a flat upper line. It's usually a bullish pattern]. The big test will come just shy of the 100 level. If the yen can break though that barrier, it will stake a claim to becoming one of the world's strongest currencies. That would be a big change from what we've seen over most of the last decade.

Chart 1

YEN IS CURRENCY LAGGARD SINCE 2000... Chart 2 compares four of the world's biggest currencies (excluding the U.S. Dollar) since 2000. During those eight years, the Euro climbed +50%, the Canadian Dollar +47%, and the British Pound +23%. [Although not shown, the Australian Dollar climbed +42% and the Swiss Franc +52%]. All of those gains came at the expense of the U.S. Dollar. By stark contrast, the Japanese yen (black line) actually lost -2% during that eight-year period. That made it the world's weakest major currency by far. That's no longer the case.

Chart 2

YEN TAKES THE LEAD SINCE MID-2007... Chart 3 compares the major currencies since mid-2007. Since then, the Japanese yen has taken the lead with a gain of +18%, the Swiss franc (not shown) came in second at 17%), the Euro third at +12%, the Aussie Dollar fourth at +10%, the Canadian Dollar fifth at +8%, and British Pound last with a loss of -1%. The fact that the yen (and Swiss franc) have taken over the currency lead since last July is no coincidence. Those are also the two currencies most likely to gain from the unwinding of the carry trade. And their upturn coincided with the start of the major peak in the world's stock markets.

Chart 3

WHY A RISING YEN ISN'T GOOD FOR STOCKS... I first started writing about the danger posed to global stocks last summer when the yen first started rising. I also wrote that was because a rising yen was part of the unwinding of the so-called "yen carry trade". Over the last few years, global traders had been borrowing yen at almost no interest charge (shorting the yen) and using those funds to buy higher-yielding assets elsewhere including currencies and stocks. For awhile, it almost seemed like the global rally in stocks was predicated on the yen staying down and providing a continuing supply of cheap global liquidity. That all started to change last summer. Chart 4 shows a generally inverse relationship over the last two years between the Dow Jones World Stock Index (blue line) and the yen (black line). Note that every blip in the yen since the start of 2006 coincided with a market pullback. Last summer, however, the yen turned up in a more serious way. The upturn in the yen during July coincided exactly with the start of the topping process in global stock markets. Each subsequent yen upturn (November and December) coincided with another stock peak. That certainly suggests that yen strength is contributing to global stock weakness. That's because traders are now being forced to buy back yen shorts and sell assets elsewhere. Chart 5 shows the impact of the rising yen even more dramatically. That chart compares global stocks (blue line) to the yen (plotted as the black zero line). The blue line is in effect a global stock/yen ratio. It shows that a rising yen has been a bad thing for stocks. And there's no sign of that negative trend ending. At the risk of a bad pun, Chart 5 shows that a stronger yen has stopped "carrying" the bull market in stocks.

Chart 4

Chart 5