Monday, January 14, 2008

A Phony Rally?

If you remember the FT Alphaville post from November "It's The Yen, Stupid" about Ken Fisher's thinking on the Yen carry-trade (yes, folks are still doing it):

The most amazing statistic you never heard, according to Ken Fisher, chief executive of Fisher Investments and Fisher Wealth Management, is the year-to-date daily correlation between ups and downs in the global stock market versus spreads between the yen and the euro: 93 per cent, or “beyond eye-popping”, Fisher notes in the FT’s Insight column on Tuesday.

On days when the euro rises against the yen, stocks rise. On days when the yen rises to the euro, stocks fall. This year’s daily yen/euro changes perfectly track this summer’s stock market correction and subsequent resurrection. Make a chart of stocks, then the yen/euro spread; slip one on top of the other, and they are virtually indistinguishable.

It ‘s all driven by the yen carry trade financing the global bull market. Yet, notes Fisher, “if anything torpedoes this bull market, it will be a rising yen, probably driven by Bank of Japan monetary tightening”.

The same correlation is true, to a slightly lesser extent, for individual country stock markets and the relationship between the yen and other currencies.

The 2007 year-to-date daily correlation coefficient between changes in the yen/euro spread and the MSCI World Index is 0.93. For the S&P 500, it is 0.89, for the FTSE 100, 0.86, and for Germany’s DAX, 0.87. All higher than most people can fathom

The correlation of the MSCI World to the yen/sterling spread is lower, at 0.75, but is still sky-high. To the Australian dollar it is 0.86 and to the Canadian dollar 0.81. All breathtakingly high. Only to the US dollar, which everyone fears, is it materially lower at 0.37....MORE

Last I saw, the Yen was stronger at 107.83 to the buck, from 108.97.