Aussie/yen cross: Is it the canary in the coal mine?

A look back

The Japanese had a real estate bubble collapse in the early 1990s. They also had/have a banking system crippled with toxic debt as a function of excessive speculation. Without going into mind numbing detail, the Bank of Japan decided to aggressively cut rates and engaged in Quantitative Easing measures for the better part of the past two decades in an effort to reflate their economy.

From August of 2006 until it double topped in July/November of 2007 the Aussie/yen cross was above 87.50. It got as high as 106 in summer of 2007 (ah…..the good times) and then cracked a bit (subprime is an issue) only to recover going into the end of 2007 (subprime is contained). The week after Bear Stearns was ushered into an arranged marriage with JP Morgan in March of 2008 the Aussie/yen cross traded down to 90.   

When the markets (erroneously) believed that Bear Stearns was a “one off”, the cross began to climb higher again, moving up to almost 103 by July 4, 2008. Whistling past the graveyard?

That summer everything changed. If you’re reading this, chances are you probably have some painful memories as things got weird. 

The Aussie/yen cross fell from around 104 in summer of 2007 to about 56 in early 2009, more than 46%.

Over the same time frame the S&Ps fell from 1425 to 670, a decline of more than 50%. Though not as dramatic, the S&Ps fell significantly shortly after the other times the Aussie/yen crossed above 87.50 (see chart below).

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