From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
All eyes have been on the US dollar as it presses to new 52-week highs.
But its recent rally hasn’t been accompanied by the usual risk-off behavior we’d expect. Actually, it’s been quite the opposite.
Bonds have been rolling over, commodities and cyclical stocks continue to march higher, and the yen can’t catch a bid.
To us, the evidence suggests the USD is momentarily decoupling from its classic intermarket relationships as it grinds higher in the face of all this.
If the US dollar is out of sync with the action in other asset classes, where can we look within the currencies market for a clear perspective of investors’ attitudes toward risk?
That’s right... the yen!
Let’s look at a couple of charts highlighting the Japanese yen’s weakness and discuss what it means for the current market environment.
First up is the classic risk-appetite barometer, the AUD/JPY cross:
This is a very commonly observed risk-on pair, not just due to the defensive nature of the yen but because the Australian dollar is one of the more pro-cyclical currencies among developed economies.
Not only is it showing resilience as the USD challenges new 52-week highs; it’s also ripping higher along with it!
AUD/JPY has been making higher lows as momentum improves, and just yesterday it made a decisive move back above the key 82 level. This breakout sure seems like the real deal, as it was accompanied by a spike in the RSI-14 into overbought territory for the first time since Q1.
That’s the type of momentum we want to see when something takes out a crucial level, as it adds a greater degree of conviction to the move.
It’s apparent by studying the AUD/JPY that risk-seeking behavior is entering the market, regardless of the price action in the US Dollar Index.
But we’re not just seeing this Yen weakness against the AUD. There have also been significant breakouts in other yen-denominated crosses lately.
Here’s a chart of the USD/JPY cross:
Like the AUD/JPY, the USD/JPY cross broke higher yesterday, slicing through a key resistance level at its 2020 highs.
Risk is very well defined at this area of interest just above 112. We want to be long, but only if we’re above that level, with an initial upside objective around 118.15.
If the next leg of a cyclical bull market in stocks and commodities is underway, we see no reason why this cross couldn’t retest its former 2015 highs of 125.86.
Investors turn to the yen carry trade when they're positioning defensively. But instead of strength from this safe-haven currency, we’re seeing weakness across the board right now.
This is critical information surrounding risk appetite, and it supports the strength we’re seeing from commodity markets and cyclical stocks of late.
Like bonds, stocks, and commodities, the Japanese yen does not fit with the recent price action in the US dollar. Instead, it suggests we are in an environment where investors are embracing risk, not hiding from it.
We’ll continue to monitor the AUD/JPY and other yen crosses for insights into investors’ posture toward risk. But, for now, we think animal spirits are alive and well in markets, and the dollar is simply doing it’s own thing.
Don’t overthink it.
Thanks for reading. As always, let us know if you have any questions or comments.
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