Just had a look at this AUDJPY weekly chart. Price has been heavy for a good 18 months now with Yen remaining bid vs AUD. I tend to find that intraday, AUDJPY acts as a risk on/off proxy. However, over the last 18 months we have seen a strong decoupling, whereby equities have been heavily bid and the pair has been very much offered. You can see that we are also heading lower on the correlation coefficient. Is this recessionary?
Clearly this is due to absolute and total confusion in the markets and severe yield seeking behaviour where there isn’t really any base for it. The reason could most definitely be down to central banks buying up a large part of the equity markets. Look at Japan for example. 65-70% of the Japanese ETF market is owned by the BoJ. The Fed has always maintained that they want to have realised financial stability; surely this adds to this argument? Furthermore, it could show why Yen is actually very strong. ‘Real’ money isn’t actually in the market and so investors are still bid Yen as a safe haven and treasuries. It would explain the heavy risk on and converse risk off behaviour occurring simultaneously.
Since the equity risk premium has practically been eroded away by low interest policy, this means that the performance of global equity markets has really been down to this, and not innovation, earnings (which have remained stagnant) etc. This can be seen here:
I mean, if this isn’t a bubble then what is?
September: a rate hike is currently priced in at 24%. For December it is priced in at 44%. Another rate hike would indicate deleveraging of US markets. That could be a trigger for downside movement.
Nice post! I agree with the rate hike could trigger downside movement, think the strong yen is mostly a byproduct of a weak dollar. When ppl really started questioning whether the fed would move at all in 2016 we saw the yen strengthen, now that ppl are starting to price in another rate hike i expect yen and euro to resume their weakness. – @soolebop
Funny you say that actually because historically after a rate hike the USD has actually decreased in value! I'm still heavily bearish USD since the PBoC fx swap lines are offering about 2-3 yards of USD per day.