The most important indicator in the world right now: The yen
Alan Ruskin at Deutsche Bank forecasts 115 by the end of 2014. Steven Englander of Citigroup predicts 107 but said, "I think the risk is very heavily concentrated to the upside"—meaning a weak yen is set to weaken further.
The relationship is very much intact: When the yen weakens, the U.S. stock market tends to rise, and when it strengthens, equities fall. Why?
The yen has always been a key sentiment barometer, a read on the mood of global markets because of the carry trade: when traders use yen to fund cheaply (because of its low rates) and buy riskier, higher-yielding currencies such as the Australian dollar. When Aussie-Yen gets bought (Aussie strengthening against the yen), the movement in risk assets—including global equities—follows.
(Read more: Panic over; buy EM currencies: HSBC)
What's new is that Abenomics has supercharged the traditional carry trade. Part of Prime Minister Shinzo Abe's plan is to inflate the economy and assets by massive quantitative easing, or bond-buying. The central bank is buying $78 billion a month and doubling the monetary base—more powerful QE than the Fed's because Japan's economy is smaller.
And what's even newer is the Fed's tapering, or scaling back, its QE, making Japan the center of the liquidity action. And the dollar-yen more of a carry candidate (Fed pulls back as BOJ ramps up).
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