Monday, December 24, 2007

Yen carry trade

Since June we've watched as the Yen carry trade has unwound. Also since that time the market has struggled matching the Yen tit for tat. As the yen sold off the market recovered if it strengthened the market waned. We are now at an interesting junction in not only the Yen but also the dollar. The Yen has now become oversold. In an up trending market oversold conditions should be bought. That would suggest that we are going to see the up trend resume soon. If the correlation holds then the market is probably going to fade again. Take special note that the week before last even though the Yen weakened the market still sold off hard. That would suggest to me that any strength in the Yen now is going to be deadly for the market. Now let's look at the dollar. The dollar is in a secular bear market no thanks to the Fed who seem to be determined to reduce our currency to the approximate value of a sea shell. Take note that the dollar is now overbought. Overbought conditions in a down trending market should be sold. On top of that looking at the weekly chart we see the dollar right up against the descending 20 week moving average that has tended to reject rallies this year.

It looks to me that conditions are ripe for a reversal of these two trades. The end result should again be pressure on the stock market and a boon to gold.