Will Yen Signal The Correction?
Michael A. Gayed | Sep 14, 2014 02:08AM ET
“Traffic signals in New York are just rough guidelines.” - David Letterman
In the pre-Abenomics era, the Japanese Yen would often serve as a strong indicator of heightened volatility and stock market correction risk. The Yen tended to rally as a haven for scared money during such periods, while a depreciating Yen often meant risks were easing and risk-taking in overall asset markets was returning. However, much of the relationship of the Yen to risk sentiment appears to have changed following aggressive actions by the Bank of Japan to target a lower currency in an effort to force reflation.
Having said that, there may yet be a point where the Yen may indeed be a warning sign of heightened market stress ahead. Consider the fact that many areas of the market which tend to do well preceding harsher conditions have indeed done so in 2014, with long duration Treasuries and Utilities most notably abnormally strong. Equity volatility has remained subdued despite their out-performance, however persistent leadership likely can only be ignored for so long. Perhaps the final confirmation comes from the Yen trying to push higher despite downward pressure from Kuroda. Our own equity sector ATAC Beta Rotation Fund (BROTX) appears poised to take on a more consistent defensive all-in sector stance given recent intermarket weakness.
Take a look below at the Currency Shares Japanese Yen Trust ETF (ARCA:FXY) in dollar terms. Note that in late-February 2012, the Yen began rallying ahead of the April-May correction in stocks at the time, before suffering an unrelenting period of decline thanks in large-part to the election of Shinzo Abe and the aggressive stance he began taking on changing inflation expectations.
There was a minor period of strength in January 2014 in what appeared to be the first signs of a correction before markets V-ed right back to higher highs. The Yen on the far right seems to want to resume its decline, which might be indicative of another pulse in risk-taking. However, if the Yen stabilizes at these levels and begins to stage a recovery as it did in January, that, combined with negative seasonality for stocks in the September/October period, and persistent leadership in Treasuries/Utilities may finally be a true warning sign that conditions are about to change.
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