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?

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