Macro Wrap – Yen in the Driver’s Seat, $FXY

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Risk appetite this year has been driven by yen weakness.  (For background on why, my post here.) Global equity markets started their tremendous rally when the USD/JPY rate broke out (stronger USD, weaker Yen) in mid-November, and it has been a very strong uptrend ever since.  The Yen bottomed out on May 22nd, and the SPX, not surprisingly, topped out on May 22nd.  So how does the Yen look vs. the USD and other currencies today?

Starting with the USD/JPY chart, it has broken the 50 day moving average (in pink) for only the second time during its roaring run:

USD/JPY 1 year daily chart, Courtesy of Bloomberg

USD/JPY 1 year daily chart, Courtesy of Bloomberg

The previous break of the 50 day ma was quickly followed by a rip to new highs in April after more aggressive pledges from the BoJ.  This time around, if the 50 day ma does fail, the key area to watch for support is around the March highs between 96.50 and 97.00.

The EUR/JPY cross has not been as strong since the Euro topped out in February, but it is still holding up above its 50 day ma in the latest bout of Yen strength:

1 year daily chart of EUR/JPY, Courtesy of Bloomberg

1 year daily chart of EUR/JPY, Courtesy of Bloomberg

Its 50 day ma comes in around 129.15, and the next important support is around the 127.50 area.  A break down of this cross could signal Euro weakness as much as Yen strength.

Finally, the weakest major currency over the past 2 months has been the Aussie Dollar.  The AUD/JPY cross has historically been an important risk barometer for the broader market, but the Aussie’s recent weakness has been viewed as isolated to Australia rather than a signal for global risk appetite. (My trade from last month anticipating Aussie dollar weakness on those trends.)  The cross is quickly approaching its 200 day moving average after a steep decline since April:

1 year daily chart of AUD/JPY, Courtesy of Bloomberg

1 year daily chart of AUD/JPY, Courtesy of Bloomberg

But for stocks, the most important cross to watch is going to continue to be the USD/JPY, which has traced the SPX index most closely this year.  In the short-term, 100 is key resistance and 97 is key support.