728x90 AdSpace

Latest News
August 29, 2016

JPY Crosses and Equity Indices

By Ashraf Laidi
Aug 26, 2016

The divergence between yen crosses and US stock indices has persisted for 6 months, the longest and deepest divergence since 2002. In other words, yen strength against major currencies remains despite strength in equity indices.

JPY Crosses & Equity Indices, Aug 24 2016

Reasons to yen strength

As we explained in previous IMTs and Premium notes, part of the reason to current yen strength is BoJ's inability to weaken JPY, which is largely due to inability to add purchases in JGBs. The reason BoJ has not added JGB purchases to its monthly purchases since Oct 2014 is that simply there are not enough JGBs out there. Similar problem is starting to face the BoE with its latest QE expansion.

Adding purchases of equity ETFs will not do the trick of weakening the JPY because there are simply not enough equity ETFs to increase yen supply.

Japan remains net creditor to the world with current account surplus of 3.8% compared to CA deficits in all major FX except for Switzerland.

Reasons to stocks' strength

Despite the 22nd week of net outflows in Equity mutual funds, major indices remain robust due to momentum-driven funds rather than retail players. The rise in index ETFs and the execution of programs buying indices due to price action, rather, than fundamentals is glaring factor to the recent gains. While retail investors are exiting funds, capital flows are chasing ETFs of these indices, rather than their components.

Probabilities of Fed hike in a sweet spot –Neither too high (may spook markets), nor too low (may indicate recession risk) have also helped markets. Goldlocks has been here before. I already shared with weekly Premium videos the divergence inside US indices (breadth and internals) as well as sectoral divergences. These are raising vital questions as the volatility remains supressed and the Fed grows in confidence to consider the next Fed hike.

Falling volatility and rising yen is another way of looking at the divergence, which highlights the fact that ultra low rates is the key explanation, whereby, Japanese investors find little or no yield abroad, therefore retain money at home, keep the yen supported.

About The Author:  Ashraf Laidi is an independent global markets strategist with over 15 years' experience. Author of "Currency Trading & Intermarket Analysis", he is the founder of AshrafLaidi.com, and served as Chief Strategist for CMC Markets with several #1 rankings at FXWeek and Reuters. Ashraf holds an MBA from the George Washington University. and is fluent in English, Arabic, French, and Spanish

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle

  • Blogger Comments
  • Facebook Comments
Item Reviewed: JPY Crosses and Equity Indices Rating: 5 Reviewed By: EconMatters