Unwinding of the Yen Carry Trade

I just heard a commentator on CNBC start talking about the unwinding of the Yen carry trade as one of the reasons for the recent market weakness.

Readers of this blog know that I have been harping on this for weeks. A look at the chart above shows just how strong this Yen rally has been. But you can also see that it is now starting to look like it is getting overbought.

As those leveraged traders sell assets to buy back the Yen that they borrowed at low rates, they start by selling their weak holdings. But as things go on, and the market continues to weaken, they always wind up selling their big winners last.

With the drubbing of big cap tech last week, and the selling of the agriculture and commodity stocks today, I think we are seeing the final phases of that capitulation. From a contrarian perspective, this is a good sign in that it usually comes late in the market correction, meaning we should be closer to a bottom.

It has been painful to watch, and I am kicking myself for not taking some big gains when these stocks were higher in October. But hindsight is always 20/20, and if these stocks rebound and finish higher by year-end, it will not have been that big of a deal anyway.