JC Parets: 'It's The Yen, Stupid!'

In an AllStarCharts article published Tuesday, Market Technician, Founder and President of Eagle Bay Capital JC Parets took a look at the current market environment and highlighted that, although investors focused on the U.S. might have forgotten, normal markets (and especially currencies and commodities) move in both directions, and not just up.

The expert explained that “as market participants, we’re not here worried about China, or Greece, or a rising rate environment (that one is hilarious by the way) we only care about what is happening between supply and demand;” they do not care about why things are happening, but would rather focus on issues like what is going on, when and for how long.

The Yen–U.S. Stocks Correlation

Chatting with his peers, Parets noticed there is a strong negative correlation between the yen and U.S. stocks. Given that the Japanese yen is approaching its lows from 2007, which were reached just before the U.S. stock market peaked, and the aforementioned correlation between U.S. stocks and the currency, the analyst thinks that “if we found support in yen near the 2007 lows, it could present a major problem.” And this is kind of where the market is now.

“Market observers will point out that it’s not the yen dragging the S&Ps, but more so the S&P500 volatility causing unwinds in the yen carry where short sellers of yen now have to buy it back as they liquidate their speculative positions in stocks and other risk assets,” Parets expounded. While it is not clear which one sparks which, the expert only cares about them moving inversely.

Visual Representation

Below is a weekly bar chart of USD/JPY that shows the yen hitting a bottom in the summer of 2007, pretty much coinciding with the time when all of the major U.S. stock market Indices were hitting record highs.

“In this chart, [the] yen is the denominator, so a top in USD/JPY represents a bottom in yen,” the market technician pointed out. “Notice the failed breakout in 2007 above the prior two peaks from the previous 18 months. Now look today at how eerily similar the failed breakout this Summer appears on the chart.”

As it can be appreciated, the negative correlation between U.S. stocks and the Japanese yen is very strong; this trend intensifies as one goes back in time. But, which way is money flowing?

However And Wherever The Money Flows

To Parets, it doesn’t matter. “Facts are facts; it’s just math,” he concluded. “I would argue that further strength in Japanese yen will continue to wreak havoc across U.S. stocks and evening specials about markets in turmoil are here to stay. For a lower volatility environment and a stronger stock market, we want to see USD/JPY getting and staying above 122. This was the level in 2007, and it is the level that we’re once again focused on today.”

Image Credit: Public Domain