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.

As we are heading into the Powell “event” we note the JPY is signalling risk on, while the credit space remains very much unimpressed. We point out the below, it is then up to you to decide which one makes sense.

JPY pushing the huge 114 level.

JPY (white) versus S%P 500 futures (orange). Note how they have been moving in tandem YTD until the divergence that started back in October.

Both US credit, CDX, as well as European credit, iTraxx main, have been exploding to the upside and have remained “stubbornly” elevated, despite equities actually trading more calm lately.

Below is the CDX (white and inverted) versus the SPX index. Note the recent bounce in SPX remains isolated to only equities.

The similar can be found in the European credit space, iTraxx (white and inverted) versus Eurostoxx 50 futures (orange). Note the recent widening of the gap between equities and credit.

Do we listen to the JPY or Credit, or both?

Source; charts by Bloomberg