Hedge funds and brokerages typically borrow low interest rate Japanese Yen (JPY) to buy US and European equities. This creates a flood of cheap liquidity boosting the markets. What happens when this situation dries up?
Below you will see a chart of the S&P 500 (blue candlesticks) with the US dollar vs. JPY imposed above (the red line). This illustrates that the weaker the US dollar is vs. JPY, the weaker the US stock market. It is very important to note this trend and watch it closely.
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[...] the Yen’s strength and US market weakness this week. This relationship exists because of the carry trade. It will be important to keep watching this trend until the Federal Reserve speech Friday at [...]