Dollar-Yen pair and S&P 500 have a strong positive correlation, given the Yen’s status as a funding currency.
However, over the last one month, the correlation weakened. S&P 500 inched higher from Dec 30 low, while the Dollar-Yen pair topped out on January 3.
USD/JPY and S&P 500 daily comparison chart
- As we can see, the index and the currency pair are moving in the same direction (lower) again.
- The selling in the USD/JPY pair stalled around 112.50 levels. Moreover, a double bottom formation can be seen at 112.50 levels.
- A daily close below 112.50 would not only mark the continuation of the retreat from the recent high of 118.66, but could also drag the S&P 500 index lower… given the weakness in the USD (risk currency) and strength in the Yen (funding currency, carry unwind) would mean the Trump Trade has run out of steam.
- Equity bulls out there need to keep an eye on the USD/JPY pair!