Does a Stronger Yen Lead to a Weaker U.S. Stock Market?

USDJPY Daily 270513Good Morning, Friends; Many thanks to those readers who are veterans for your service, and also to any who are currently serving. There is, or was, a West Point Investment Club. I participated in a meeting with the group some years ago; one of the Cadets raised her hand, and asked my CEO, a West Point grad who completed two tours as a junior officer in Viet Nam, “Sir, what do you find to be the hardest thing about running a large bank?” To which the CEO replied “Crawling out of the jungle while trying to hold on to your best friend, who’s now missing a leg, is hard. Running a bank is easy.” I still use the mug that was presented to me by the group’s faculty sponsor.

I’ve heard that the FX market never sleeps; while that may be true, it does doze off from time to time, and Memorial Day, when both London and New York are closed, is one of those. Asia was open overnight, however. A number of pundits have attributed the softness in U.S. equities last week to strength in the Yen (that is, a lower USD/JPY). I’ve run some correlations between USD/JPY and the SPX, and I can’t find anything that seems compelling. Most volume in USD/JPY occurs, of course, in Asian time, and I suppose it is possible that I’m just not utilizing the correct lags in fitting the curves. 

ES Daily 270513While we trade technically here, I feel more confident when I understand the fundamental rationale for a chart pattern, and in the case of Yen/U.S. equities, I’m hard pressed to identify a compelling relationship. The Yen is weak because the Japanese government, intent on kickstarting the local economy, is doing what it can to devalue its currency. Of course, most governments are at least hopeful that their currencies will weaken (or, at worst, not strengthen). Not all currencies can simultaneously devalue, however. At the moment, Yen is in the lead in that regard. The U.S. is a more important market for Japanese goods than vice versa; if the Yen becomes stronger, and makes it tougher to export goods to the U.S., the impact on the U.S. stock market should, it seems to me, be muted. 

News that Chinese growth may be unexpectedly slowing did come as a bit of a shock to the FX market last weak, and (along with exposed positions) explains a good deal of the weakness in USD/JPY. It may also have played a role in bringing U.S. stocks lower. Still, the proximate cause of the latter seems to have been growing unease over the Fed’s near term course. It’s more or less received wisdom that the stock market’s gains have come on the back of unprecedented purchases of long term notes and bonds by the Fed; if there’s a perception that the stimulus might be withdrawn earlier than anticipated, it wouldn’t be surprising that those who only recently tiptoed back into the stock market might be feeling uncomfortable. 

One of the most valuable things that I took away from Todd’s E-mini course is that it isn’t necessary to anticipate what the market will do in order to make money. If we can employ the methods that Todd uses to identify the trend accurately (and on the daily chart, both the SPX and, for that matter, USD/JPY still appear to be headed “up”), It’s very possible to generate good returns using the other techniques that he teaches.


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