Yen weakness

The Japanese currency has weakened yet again after Bank of Japan Governor Kuroda said “monetary tightening is not at all a suitable measure” citing recession odds and higher commodity prices. As the ECB and RBA look to catch up to the Fed in terms of taming inflation, the BOJ cannot.  

Take a look at the Chinese offshore yuan versus the Japanese yen. Both are major Asian exporters as well as net importers of oil, getting hit hard by higher commodity prices and competing to get their goods to the rest of the world.

When the offshore yuan last hit the 20 level against the Japanese yen in April, China devalued its currency further against the dollar. The logic there is if the yuan is cheaper, then their exports will be more attractive and therefore attract more business.

So keep an eye on the Japanese yen against other pairs, and not just the U.S. dollar. There are ripple effects, especially as consumers try to get their hands on commodities and exports.

Aussie-Yen creates roadmap for S&P 500

•  live chart Australian Dollar/Japanese Yen
  

The Aussie serves as the “risk-on” piece because the country is the top global exporter of iron ore, among other commodities, and its primary trading partner is China. The Japanese Yen serves as the “risk-off” part, as Japanese assets often capture haven flows. The pair is also highly liquid, with both currencies among the five most traded in the world. Taken together, their global exposure through commodity, credit and FX markets can create a road map for other risk assets -- like the S&P 500. 

 

The Australian Dollar or "Aussie" versus the Japanese Yen

 

The chart shows the Auussie-Yen has been in a downtrend over the last two months since the Omicron variant headlines broke. And that's likely to continue into the holidays with thin liquidity and light trading volume. Add on this latest variant's rapid spread (and the global lockdowns that come with it) as well as the loss of Senator Joe Manchin's support for Biden's Build Back Better Plan (something that the market was counting on) and it suggests that maybe that traditional holiday "Santa Rally" for risk assets like the stock market is in jeopardy.

Biggest risk for U.S. stocks found in currency markets

The biggest risk facing U.S. stocks is the Japanese yen’s increase in value against the dollar, according to Gina Martin Adams, a strategist at Wells Fargo Securities LLC. The currency’s strength is an indicator of “the persistence of deflationary fears and the diminishing confidence investors have in central-bank capability to re-inflate the struggling global economy,” she wrote in a report Monday. The U.S. currency dropped 11 percent against the yen for the year through Wednesday, while the S&P 500 Index rose 0.4 percent.