Another proxy for risk appetites in the market comes from the relationship between the euro and the Japanese yen.
The so-called euro-yen cross exchange rate is so important because hedge funds and other institutional traders use the “yen carry trade” pair to raise capital for speculation. They short the yen and go long the euro.
It’s such a popular trade that oftentimes the S&P 500 will closely mimic, tick-for-tick, the vagaries of the euro-yen exchange rate.
The problem is right now the euro-yen rate is warning that something is amiss. In fact, if the relationship between stocks and the euro-yen carry trade were restored (they’ve diverged so far this month), stocks would be down and testing their January lows, not pushing to record highs.
That would be worth a 5% decline from current levels.
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