EUR/JPY and the Yen

This is the earlier post of the EUR/JPY which runs the market or lets just say has a very strong correlation to the market, especially on overnight ramps.

Yesterday in my 10:59 Market Update I posted a "Shocking chart" for anyone who follows the currency cross vs the SPX futures (ES- S&P E-minis)...

The EUR/JPY are the red/green candlesticks and purple is ES, my comment yesterday under this chart was, "this is not normal".

Overnight did you notice the futures didn't ramp? Take a look at the pair overnight...

 This 5 min chart of the EUR/JPY shows the pair making a high for the week right around yesterday's 4 p.m. New York close, you can see from there, the overnight session was ugly, maybe it was partly due to the Chinese carrying out a reverse repo (as it is Thursday), but putting a fixed rate of I believe 4.3% or so, in any case it was well above the early October rate of 3% (the translation being it seems the Chinese are managing a tightening episode, not ending one). It certainly could have been Japanese Food and Energy inflation rising at a fast clip while wages are falling for something like the 14th or 15th consecutive month. It could be whatever brave souls are left in carry trades didn't like yesterday's F_O_M_C and decided to close them up.

Remember a carry trade is one of a hedge funds best tools to increase their funds or we might say margin, so long as it's going their way. You might recall that BOFA/Merrill Lynch just announced this about their Hedge Fund clients...

Last week, BOFA's hedge fund clients unloaded the most stock since 2008, while institutions and retail clients were net buyers.

 Net sales were entirely due to hedge funds, whose net sales were the largest since December 2008, and the second-largest in our data history.

In any case, around 12:40 or so I posted this 3C chart of the FX pair with a slight positive divegrence as they went from highs for the week to lows.

Important Market Update

The scaling on this chart is horrible, but you can see roughly the impact on the market... (ES)

As 3C posted a positive divergence at the EUR/JPY lows of the week, both the FX pair and ES went higher until the FX pair turned down taking ES with it.

Amazing huh? I'd say back around April I was posting charts of the 3 pairs every day, it probably got annoying because it really doesn't seem to be market related, it's not like, "NFLX just crossed above its 10-day moving average", but it was clear that if we wanted to know when smart money was heading for the doors, the Carry trades were one of the best barometers of that, now they are just being abused through this unnatural correlation.

I'm not even going to guesstimate what I think might happen here based on the current divergences until/unless I see something much clearer, but if the pair were to trade laterally for a bit, they could probably manage a more impressive bounce than earlier today and that might in turn cause some chop, Not to say we didn't already see some chop today, but I actually had something a little more extreme in mind.

For those of you who like to or need to plan ahead because of your jobs, I'll show you something that might be of interest. There are two articles I wrote in April of this year when the Bank of Japan first introduced QE-Zilla (doubling their monetary base in 2 years). The two articles are linked near the top right side of the members' site and called, "A Currency Crisis". Obviously many of the finer details are out of date, but the broad assumption was that the Yen would likely rise about the same time the US market crashed (and there are crash stories everywhere and from reputable people, honestly I don't like them at all because the market usually does the opposite of consensus so these stories popping up everywhere the last 3 weeks make me uncomfortable, but I just try to rely on analysis as these same people change their tune in a day).

For the Yen to rise, I'd think some pretty unbelievable things would have to happen in Japan and especially as it relates to probably the most ambitious QE ever seen, I don't pretend I have the answers to that one.

 This is the daily 3C chart of the single currency Yen futures, you can see what happened after the initial drop in April after the BoJ's policy announcement and a large triangle since then.

In my experience a triangle this large is almost never a consolidation triangle in which case it would be expected to break lower, but coming after a downtrend and this size they are usually bottoms. Around April also is when we started seeing changes in character in the carry trades and they were being unwound so some of this 3C divergence may be due to repurchasing the Yen to unwind the carry trade and perhaps the BoJ's QE has kept prices down during that period, it's difficult to tell, but there are very clear problems with their CB policy. It does look to me like this triangle is tightening up in to an apex and would be expected to breakout one way or another very soon.

Correlations are funny things, so I can't say with certainty a rising Yen will accompany the destruction of US markets, but I can't see how it can help as carry trades to create risk on leverage would be out of the picture.

The 60 min chart is leading positive too and this is more of an issue now that the triangle is winding up toward an apex or end (point).

The 30 min chart looks like the Yen will head higher in the next week or so as the rallies and declines are smaller and smaller.

I'd take a look at those articles, keep an eye on our currency analysis and pay attention to what's going on with cash crunches or interbank liquidity crisis in China and how China reacts to Japan as well as the Japanese market, particularly their JGB futures rather than stocks.