Why “we’re all USD/JPY traders now”

<p>“We’re all Keynseians now” – Milton Friedman The above quote is often misattributed to US President Richard Nixon, when he closed the gold convertibility window. […]</p>

“We’re all Keynseians now” – Milton Friedman

The above quote is often misattributed to US President Richard Nixon, when he closed the gold convertibility window. Regardless, the phrase “We are all _____ now” has since become part of the lexicon for anyone trying to make a broad generalization about the current zeitgeist.

Amidst the recent global market turmoil, I’d like to postulate that “We are all USD/JPY traders now.” That’s because USD/JPY has become the de facto measure of risk appetite of late, leading to correlated moves in equities, commodities, bonds, and even other currency pairs. The most salient short-term example of this phenomenon is the recent roller coaster ride in US equities.

Both USD/JPY and the S&P 500 began to sell off in earnest last Thursday, with the drop accelerating until the absolute panic bottom on Monday morning. From there, the two instruments rallied back to regain some of the previous losses by midday Tuesday before turning sharply lower once again. Both USD/JPY and the S&P 500 bottom ahead of today’s Asian session and have chopped around in volatile ranges so far today.

For day traders, it’s worth noting that USD/JPY has formed its intraday tops and bottoms slightly ahead of the US stock market index; furthermore, USD/JPY has gone on to set higher lows since Monday’s panic bottom, whereas the S&P 500 hit a minor lower low last night. The currency pair’s current bullish divergence with US stocks suggests that we could see an equity rally in the short term (in other words, the green line on the chart below may “catch up” to meet the blue line), which could create the widely-awaited oversold bounce.

That said, if you share my colleague Fawad Razaqzada’s longer-term concerns about USD/JPY, it could also bode ill for global stocks. As we noted yesterday this week’s massive drop has done plenty of technical and psychological damage, and the pervasive “buy the dip” mentality that has characterized the past four years has been broken.

One way or another though it looks like “We’re all USD/JPY traders now.”

USDJPYSP5008-26-2015 2-16-52 PMSource: City Index

*NOTE: Correlations can change, and there are other factors beyond USD/JPY that impact the S&P 500.

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