USD / JPY Update

In last night's post the last remaining question I had about the the USD/JPY carry trade , which was, "Was last week's reversal of the FX pair and market's correlation a one time event simply because of the F_O_M_C ?" or as I suspected, "Is the last FX carry trade now unwound and thus the correlation is not temporary, but a reflection of the carry trade being unwound ?"

In last night's post, I think I demonstrated pretty conclusively that the latter is the answer.

Why does this matter? Because now FX will still tell us or at least be a large part of the puzzle, what to expect from the market.

The 7 month USD/JPY/market correlation flipped in about a day last week right around the F_O_M_C, this typically doesn't happen this fast. That means the new correlation is the one you might be use to historically, it's the legacy arbitrage $USD correlation, the Yen is also useful, everything is exactly the opposite of the last 7 months and the last month or so, the USD/JPY correlation was so tight, it was moving almost perfectly with the market.

To the point of the post... The legacy $USD correlation is simple, if the $USD moves up, the market moves down, think about it in terms of oil (the same correlation applies to oil), if the $USD is worth more, then the price of a barrel of oil adjusts down for the stronger dollar, if the dollar weakens, they have to charge more for a barrel of oil to get the same value, it's the same with stocks and almost all risk assets. This wasn't true before because a rising USD meant the carry trade was rising and that is what was driving the market.

Last night I showed you the USD and Yen 30 min charts which confirmed the Index futures' 30 min charts, so on an intraday and VERY near term basis (this afternoon perhaps?)

 The 1 min $USD tells us almost nothing about intraday direction of the USD, thus the market.

The 5 min chart is VERY clear, it has that same narrow trading range I mentioned a post or two back that is almost always a giveaway of institutional action, I think the trend in underlying action is pretty clear suggesting the $USD is very close to turning down, the market moves the opposite of the $USD now.

 The 1 min Yen shows some intraday wiggles, nothing very clear though.

Move to the 5 min chart and the Yen is not only in a large relative positive divergence already sending it higher off this week's lows, buy also leading to a new high for the chart, the Yen will tend to move in the opposite direction of the $USD and with the market.

At this point all you need to do is reconcile the timeframes and apply them to the market timeframes, you know what a 1 min intraday chart does, the 5 min is pointing to the next trend (this morning is not a trend in the sense we are talking about here).

That would be like the ignition of a new trend that starts the engine of the 30 min charts which are the same as the 5 min charts, just a much bigger / stronger divergence.

FX is telling us pretty clearly what to expect, near term or intraday noise and volatility almost for volatility's sake, stop runs, etc, however very soon, I'm thinking as early as the afternoon session, the 5 min charts will take over and the trend will not only change, but become a clear trend.