Click to Enlarge Despite all that’s happening in the market right now, the yen carry trade remains a dominant force. Hedge funds continue to maintain very large short yen positions, accumulated during the past year as the new government in Tokyo actively weakened the yen to restore their economy via increased export competitiveness. And for a while, that boosted Japanese stocks in a big way.
But now, as the U.S. government succumbs to political dysfunction, the yen’s traditional role as a safe-haven currency is making a comeback. As a result, the yen is threatening to push up and out of a multimonth consolidation pattern going back to April. If so, those hedge funds will be forced to scramble to close their yen carry trades, magnifying the move.
That’s a negative for yen-sensitive Japanese exporters like Sony (SNE), which is collapsing out of a topping pattern going back to May as it falls below its 50-day moving average — a technical support level SNE used throughout September.