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Jason Bourne asked for some thoughts on the Yen. Well, the poster Sleeping Bear over at Slope of Hope pointed out that John Murphy (a technical analysis grandmaster) noted the strong correlation of the Yen:Euro cross with the global risk trade. Here it is (blue) in Yahoo! versus the S&P 500 (red):
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I feel like I should have made this a regular chart of mine ages ago, since the Yen strengthens versus the dollar when the deflation trade is on, while the Euro gets weaker, so of course these two should be paired for an extra sensitive indicator. Come to think of it, I even successfully traded the Yen:CHF cross last fall and winter, and the CHF trades like a slightly harder Euro.
Anyway, you can see the divergence in the chart last July, and more importantly in Feb-March where the Yen strength didn’t follow through as equities continued lower in their 5th wave. This was just the kind of hint you would expect in a 5th (ending) wave, along with the relative weakness in the VIX and Put/Call ratio compared to the panic conditions of Wave 3 (Sept-Nov). Yours truly was too dense to remember this, which is part of why he missed the rally bus.
Well, I see a divergence here again, but this time it’s bearish for stocks. The Euro has failed to make new highs this summer as stocks have surged, and in fact the Yen has been creeping higher. This jives with my current read on an extreme in dollar bearishness. A dollar and Yen rally vs. the Euro, Pound, Loonie and Aussie would bode poorly for stocks and commodities. Conversely, if the Euro recovers after a correction and breaks out here, who knows how high stocks will go?
Aki_Izayoi
August 2nd, 2009 at 11:11 pm
Wow, the EURJPY FX cross is also the enantiomer of the S&P 500.
Mike
August 3rd, 2009 at 4:32 am
Bjorn asked about my concern over counterparty risk with my options strategy this time around.
I will just play it by ear. If all goes according to plan, I’ll sell into major declines a bit at a time, and not try to hang onto everything until the end. Also, as things get rough, I may phase out of options and use futures more.
I do derive some measure of comfort from the circuit breakers at the exchanges and the OCC itself. Also, if we have the kind of grinding decline that we had after April 1930, there won’t be waterfall conditions again, though of course that is what wave 3 of 3 is supposed to be. EWI is calling for a new high in the VIX, after all.
jason bourne
August 3rd, 2009 at 4:59 am
Thanks for the Yen article, Mike. It’s a compliment
Well, today (Aug 3, 2009) the dollar is getting raped all over by all those risk currencies. Many of them set multi-month highs, except for the euro (or not yet). I guess SPX 1000 is breached tonight. Bears are capitulating, but it seems more (perhaps significant) capitulation is still to go.
A big capitulation today:
http://www.telegraph.co.uk/finance/markets/5963702/Commodity-prices-set-to-rise-further-Roubini-says.html
But if we remember the H&S fakeout ending in mid-July, stocks have been flying non-stop — sprinting. The analogy would be that of sprinting vs. marathon. The “sprint” may have caused the top in SPX to be lower & sooner than it could potentially achieve if it were to correct deeply first.
Nevertheless, today’s opening will likely be one of the worst nightmares for the bears (I’m hurting, too — although I’m all cash, the dollar stinks for now)
Mike
August 3rd, 2009 at 5:50 am
Yeah, it’s ugly out there today. Look at copper and silver, too. But I agree, we’ve gone too far too fast. I am glad to see this final plunge in the dollar — sentiment is so bad right now that it can’t go much lower, so when it turns that will likely be a major bottom. This really is a great set-up for a currency trade.
And bonds are still holding up above last weeks lows, not confirming the dollar.