The JPY is one of the bigger “risk” indicators on every macro trader’s screen.

When the JPY weakens, the stock market (mainly the US) tends to rise, and when the JPY strengthens, equity markets tend to fall. Why this relationship?

The JPY is a great “mood” risk indicator due to the carry trade, investors use the JPY to fund cheaply due to low rates in Japan, sell it and buy the USD, all in order to buy riskier assets such as US stocks.

Depending on global correlations, the JPY tends to move in tandem with other equity markets at times as well.

Below is a chart of the JPY. It has been weakening some time and is now at the huge 114 level.

Below is a chart showing the Eurostoxx 50 futures, orange and the JPY, white. Note how the two used to move in tandem since last year, but this relationship started widening during the sell-off in October. The chart has created a relatively big gap over the past weeks.

Just as in our previous post on credit and equities, we point out that decoupled assets tend to find a level where they start “coming in”. Irrespective if you are bullish or bearish equities, we suggest watching the JPY carefully here. For the more macro interested traders, why not a Eurostoxx 50 vs JPY trade at these levels?

Source: charts by Bloomberg