USDJPY Will Drop as Risk Aversion Intensify, But It Will Rally if Severe
• There are many barometers that we can use to gauge the direction and intensity of investor sensitive
• As risk aversion hits a severe level, all carry/Yen crosses drop; but in true liquidation, USDJPY will rise
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The S&P 500 is a great measure of risk aversion, but the USDJPY may be better. From the equity index, words like 'persistent', 'durable' and 'complacent' have been used to describe its incredible six-year run. When the US equity benchmark turns, it will therefore be indicative of a more intense shift in sentiment. This is a valuable measure for a very all-encompassing but also boundless concept, but it may not be the best. In the FX market, USDJPY can measure a more extreme level of fear. Like US equities, carry appetite has extended through minor pangs of risk aversion with the support of the BoJ's stimulus effort and a robust reach for yield. When risk aversion hits a rolling boil, the USDJPY and all Yen crosses will drop. Yet, when fear hits an extreme, we will see another turn occur as the Dollar starts to draw more appeal than its Yen counterpart as 'liquidity' overwhelms the need to deleverage existing carry positions. At that level, USDJPY will turn higher and we will have a signal of a much stronger drive in sentiment. We discuss USDJPY and its risk measures in today's Strategy Video.
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