Dow Weakness Leads to Carry Unwinding

The Japanese Yen reversed all of its earlier losses as the selling in the Dow began to exacerbate. We have long said that the correlation between carry trades and the Dow is strong and this time around noon, we watched the Dow hit -100 minutes before USD/JPY broke down.

The turnaround in the Dow today was sharp enough that we could see a similar move lower in the Asian markets tonight. As the funding currency for a lot of speculative stock investments globally, the yen could reverse as carry trades continue to be unwound. Meanwhile, the Japanese economy continues to remain weak as the Eco Watchers survey dipped into contractionary territory in April. Despite the weakness of the Yen and the increase in corporate profitability, the man on the street is not feeling the same optimism as investors and corporations.