The JPY flashed earlier this year when we saw the mighty JPY move massively versus other crosses. The panic “low”  print was reversed, but the JPY has stubbornly been trading at the same level for a week, despite the global equity markets having put in a continuation of the risk on move from lows.

The divergence between the JPY and equities has been widening lately. This shouldn’t be neglected.

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.

The chart below shows the JPY (white) versus the SPX (orange). The two assets have moved in tandem ever since the October volatility started. Recently the two risk assets have decoupled significantly.

The chart below shows the SPX (orange), the Eurostoxx 50 (yellow) as well as the JPY (white) since the start of the year. The JPY is clearly not impressed by the global equities risk on move.

Our reasoning from mid-November of a global macro trade where we suggested the JPY versus Eurostoxx 50 relationship would come in has played out well. That spread has moved and we don’t see huge value holding it further, but we suggest watching the JPY carefully as it just seems to refuse joining the global risk on mode.

Source: charts by Bloomberg