CYCLICAL SPX vs JPY correlation - what it means (SHORT SPX)
as you can see below 8/12 months of the time the JPY is heavily negatively correlated with the spx, normally between 80-90%, there also is a pattern, that the JPY/SPX stayd negatively correlated for 8 months before turning positively correlated for about 4 months, this cycle continues unbroken below..
as we can see by the red correlation being above 0, The markets are in the 4 month "positive" correlation phase, this to me is a bearish signal for SPX bulls as
1. we are at the end of the average 4 months of positive corrs, before the market turns back to negative, thus this may be a signal that the market is going to turn bearish (in order for the correlation to go back to negative).
2. the positive correlation has tailed off in recent days, signalling it is an end to the positive trend and that the negative trend may start soon
the reason i have chosen weaker markets to correct the pair back to its negative correlation, rather than weaker JPY is because:
1. the spx is near highs so a downside turn around is more probable.
2. volume and volatility are at yearly lows - low volume means low interest in pushing the price up and the market is effectively in limbo, low volatility means volatility is likely to pick up and in turn push investors away.
3. marco econ risks/ uncertainties such as the feds tightening cycle and brexit will surely continue to be priced into long JPY and short risk assets (spx) - suggesting that JPY weakness will not be the one to give in, it will be the stocks.
4. the USDJPY isnt at all time low levels, there is more room for JPY buying before any liquidity tightens - especially if the BOJ continue to ease.
BOJ/JPY background;
the BOJ seemingly has no control over their economic target inflation, CPI is consistently negative even after years of easing and high employment vs the $ fed who are doing the opposite and hiking rates with relative success, IMO because of these factors the USDJPY should be at 130.
However its not. it is at 109, and JPY serving as a risk off asset is the ONLY explanation for its strength. there is no other macro economic reason for JPY's strength, apart from safety seeking.
(JPY continues to be a net creditor economy - this is where the perceived safety comes from)
If anyone else has a different reason for why the JPY is so strong, id love to hear it
as we can see by the red correlation being above 0, The markets are in the 4 month "positive" correlation phase, this to me is a bearish signal for SPX bulls as
1. we are at the end of the average 4 months of positive corrs, before the market turns back to negative, thus this may be a signal that the market is going to turn bearish (in order for the correlation to go back to negative).
2. the positive correlation has tailed off in recent days, signalling it is an end to the positive trend and that the negative trend may start soon
the reason i have chosen weaker markets to correct the pair back to its negative correlation, rather than weaker JPY is because:
1. the spx is near highs so a downside turn around is more probable.
2. volume and volatility are at yearly lows - low volume means low interest in pushing the price up and the market is effectively in limbo, low volatility means volatility is likely to pick up and in turn push investors away.
3. marco econ risks/ uncertainties such as the feds tightening cycle and brexit will surely continue to be priced into long JPY and short risk assets (spx) - suggesting that JPY weakness will not be the one to give in, it will be the stocks.
4. the USDJPY isnt at all time low levels, there is more room for JPY buying before any liquidity tightens - especially if the BOJ continue to ease.
BOJ/JPY background;
the BOJ seemingly has no control over their economic target inflation, CPI is consistently negative even after years of easing and high employment vs the $ fed who are doing the opposite and hiking rates with relative success, IMO because of these factors the USDJPY should be at 130.
However its not. it is at 109, and JPY serving as a risk off asset is the ONLY explanation for its strength. there is no other macro economic reason for JPY's strength, apart from safety seeking.
(JPY continues to be a net creditor economy - this is where the perceived safety comes from)
If anyone else has a different reason for why the JPY is so strong, id love to hear it
