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A Euro Yen Carry Trade Funded The June 7th to June 18th Stock Market Rally


Chart of dbb compared to fxi, ewj, eem, dnh, ewz, slx, xme documents how the recent EUR/JPY carry trade  has rallied asian and emerging markets, as well as steel and metal manufacturing stocks.

Click on chart of DBB to enlarge

Risk appetite coming off an oversold Euro, FXE, as well as hopes for European leadership for Spain’s bank liquidity crisis and commercial lending crisis, has stimulated currency traders going long the Euro, FXE, relative to the Yen, FXY,  causing investment in Spain, EWZ, and European Financials, EUFN. Tyler Durden reports COT Weekly Data Discloses Biggest Euro Short Covering Episode In History: the amount of short covering in net spec EUR short positions hits what is certainly an all time record, as just under 50 thousand (49,585) short contracts are covered. This represents a huge 44% of all outstanding EUR net shorts (-111,945) as of the prior week.

Click on chart of Spain to enlarge.

A small rise in the EURJPY since June 4, 2010 has cause a dramatic rise in the credit sensitive, that is financially sensitive Russell 2000, IWM, as well as Spain, EWZ. The Russell 2000, is the Spain of US Shares as it relies on fluid and low-cost commercial credit and a well-functioning banking, RWW, and KBE, system. 

When the euro-yen carry traders turn and drive the Euro, FXE, lower the emerging market growth stocks, XME, and SLX, as well as the credit sensitive stocks, IWM, will fall dramatically.

Institutional investors should be prepared to invest with the Proshares 200% bear of the Russell 2000 shares, SJH.  The chart of double short the Euro, DRR, shows that the carry traders are stimulating disinvesment from the Russell 2000 and rewarding its short sellers.  

Click on chart of DRR to enlarge.

April 26th, 2010 was a watershed event: On April 26, 2010, the world entered into global stock deflation.

Currency chart of FXA, FXE, BZF, FXM, CEW, INR, XRU, FXC, FXS, FXB, FXF, SCR  shows comparative currency loses since April 26, 2010 relative to the US Dollar Bull ETF, UUP: April 26, 2010, brough a great unwinding of yen carry trade investment in foreign stocks; that was somewhat set back beginning June 7, 2010.

A rising Euro, FXE, relative to the Yen, FXY, beginning June 7, 2010 as seen in this chart, helped revive Asian excluding shares, DNH; and it helped revive the Japanese small shares, JSC, more than the overall Japan shares, EWJ.

Note the difference between the charts of JSC and EWJ

Click on chart of JSC to enlarge

Click on chart of EWJ to enlarge

On April 26, 2010 the US stock markets entered into a wave 3 decline.  John Rubino in DollarCollapse article Pretty Much Everything is Headed Down provides the Australian analyst Graham Dyer’s newsletter which begins with the assertion that most of the world’s stock markets have entered a “wave 3″ decline,  specifically ”wave 3 of 3″, which, according to Elliott Wave theory, is generally the longest and most punishing of the five-wave bear market sequence where he shows a chart of $INDU falling in value.

The Yahoo Finance Chart of DIA, compared to QQQQ and RZV shows this wave 3 decline on April 26, 2010, on unwinding yen carry trade investments, and rising fears of sovereign debt default, causing financial contagion to come to financial organizations, IYG, world-wide especially the European Financials, EUFN.

China stocks, FXI, began their decline on April 14, 2010 on central bank credit tightening. 

The Euro Yen carry trade began to unwind in December 2009; those “in the know”, those ”with inside knowledge of just how serious the Greek debt situation was”, went “double short” the euro and “double long” the yen, as seen in the Yahoo Finance chart of EUO contrasted with YCL. It was at this time the Euro, FXE, really started to take a nose dive.  

Chart of EUO compared with YCL, click to enlarge

Wikipedia’s 2010 European sovereign debt crisis web page gives insight as to the series of events that started the Euro’s down-slide: In October 2009, a new Greek government is formed after the election, led by PASOK, which received 43.92% of the popular vote, and 160 of 300 parliament seats. On November 5, 2009, a new budget draft reveals a deficit of 12.7% of GDP, more than twice the previously announced figure. On November 8, 2009, a final budget draft aims to cut deficit to 8.7% of GDP in 2010. The draft also projects total debt rising to 121% of GDP in 2010 from 113.4% in 2009. On December 8, 2009,  Fitch Ratings cuts Greece’s rating to BBB+ from A-, with a negative outlook. And on Deember 14, Greek PM Papandreou outlines first round of policies to cut deficit and regain investor trust.  

But trust could not be found and the currency traders relentlessly sold the Euro against the Yen causing disinvestment out of Europe and European banks, as the chart of the European shares, FEZ, shows their dramatic tumble in early January, 2010.   It was on December 16, that S&P cut Greece’s rating to BBB+ from A-. and on December 22nd that Moody’s cuts Greece’s rating to A2 from A1. Analysis shows that the European shares, FEZ, began an Elliott Wave 3 of 3 decline on October 22, 2010. 

 Yes, the “3 of 3 wave” is the most active of all economic waves; it builds wealth on the way up and destroys wealth on the way down. We are now entering into an era where all wealth outside of gold and oil will be utterly destroyed

The current Euro Yen Carry Trade will fail and the “3 of 3″ wave down will recommence; personal investors should consider gold, GLD, as a safe haven investment.

Disclosure: I aminvested in gold coins