One of the things I try to emphasize at least twice a week is the extent to which USDJPY is perhaps the best real-time barometer there is when it comes to assessing how the market is feeling about the reflation narrative.
As you’re hopefully aware, safe haven flows typically find their way to the yen, and that means that all else equal, the yen should be flagging as equities soar. But that hasn’t been the case of late.
If USDJPY doesn’t rise with stocks, well then that’s just another sign that the reflation story is being faded.
The question for investors and traders is what happens if Trump doesn’t deliver the type of concrete details the market wants about tax reform and fiscal stimulus in Tuesday night’s speech to Congress? If the yen is already marginally bid, then will it rally sharply in the event the equities spell is finally broken?
Here with more on these rather critical issues, is former FX trader-turned Bloomberg contributor Mark Cudmore.
Via Bloomberg’s Mark Cudmore
With one glaring and important exception, most assets are trading in a roughly aligned fashion. This dominant trend points to the potential for a painful yen rally in the short-term.
- U.S. equities are the anomaly in the financial landscape. The powerful late-day rallies run counter to the fundamental narrative that seems to be driving other assets, which is a story of market disappointment in the new administration.
- When a key asset diverges so substantially, the immediate question is whether it’s the leader or the laggard? Either answer should provide a trading opportunity
- Given the fundamental arguments that this column has presented in recent weeks, it’s most tempting to believe equities are the assets that are “mispriced.” Such an attitude is dangerous at the best of times, but trying to argue that one of the world’s most liquid and actively traded markets is “wrong” seems particularly foolhardy
- Even if it’s best to avoid any directional call, the consequences of a potentially sharp correction are worth considering
- The yen, as an established haven asset, is normally inversely correlated to equities, yet it’s been strengthening significantly in recent weeks in the face of almost daily records for U.S. equities
- Across multiple currency crosses, the yen has either recently broken technical resistance, or appears on the verge of doing so imminently
- Yen speculative positioning finished 2016 at its largest net short level in more than a year. While those positions have been trimmed in recent weeks, the market remains short, according to Bloomberg CFTC data
- The yen market is offside and being short-squeezed. This looks set to sustain even amid resilience in equities, but just imagine how messy the move could get if U.S. shares crash to converge with how other assets are trading