Talking Points:
• There are a number of underlying fundamental currents in the financial system and 'risk trends' is key
• Global equities and Yen crosses tend to move in tandem as risk appetite chases return or flees volatility
• The break between the two this past session is a function of a surprise monetary policy shift
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Typically, when equities rally, USDJPY and the Yen crosses follow suit. However, that reliable correlation broke down dramatically Wednesday. A sharp rebound by the S&P 500 and Nikkei 225 to prevent critical technical signals for medium-term trend reversal occured at the same time that USDJPY suffered its biggest daily drop in six months. Has the elemental fundamental influence of 'risk trends' broken down? The short answer is no. Risk trends still haven't committed to a definitive view whether bullish or bearish. A lack of commitment is filled by complacency and nervous volatility takes over. For the Yen rally, the motivation was more pointed: monetary policy. Where the BoJ has been consistent in its effort to drive the currency lower, they may have signaled some change in stance. We look at Yen crosses and the conflict of risk and monetary policy themes in today's Strategy Video.
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