as we can see by the red correlation being above 0, The markets are in the 4 month "positive" correlation phase, this to me is a signal for SPX bulls as
1. we are at the end of the average 4 months of positive corrs, before the market turns back to negative, thus this may be a signal that the market is going to turn (in order for the correlation to go back to negative).
2. the positive correlation has tailed off in recent days, signalling it is an end to the positive trend and that the negative trend may start soon
the reason i have chosen weaker markets to correct the pair back to its negative correlation, rather than weaker JPY is because:
1. the spx is near highs so a downside turn around is more probable.
2. and are at yearly lows - low means low interest in pushing the price up and the market is effectively in limbo, low means is likely to pick up and in turn push investors away.
3. marco econ risks/ uncertainties such as the feds tightening cycle and brexit will surely continue to be priced into long JPY and short risk assets (spx) - suggesting that JPY weakness will not be the one to give in, it will be the stocks.
4. the USDJPY isnt at all time low levels, there is more room for JPY buying before any liquidity tightens - especially if the BOJ continue to ease.
the BOJ seemingly has no control over their economic target , CPI is consistently negative even after years of easing and high employment vs the $ fed who are doing the opposite and hiking rates with relative success, IMO because of these factors the USDJPY should be at 130.
However its not. it is at 109, and JPY serving as a risk off asset is the ONLY explanation for its strength. there is no other macro economic reason for JPY's strength, apart from safety seeking.
(JPY continues to be a net creditor economy - this is where the perceived safety comes from)
If anyone else has a different reason for why the JPY is so strong, id love to hear it
This divergence massively impacts the supply/demand of the pair, YEN's supply increases, whilst demand for USD deposits increases, which SHOULD push the pair much higher.
Please see the article i posted trying to show the degree of the correlation.
I do agree that in some circumstances correlations are drawn naively but in this example it is true.. infact there are few examples of where there isnt correlation either positive or negatively because all financial markets are linked in one way or another as investors only have a limited choice of where to allocate their assets for a return.
However, please dont confuse my bid for correlation as a statement of "correlation is causality". If i was saying correlation was causality, you would be right, correlation wouldn't be around for long as people would notice and it would become priced out.
Correlation is merely imo, viewing two assets move at the same time together or against to some degree - one asset doesnt cause the other to move however.
If this was the case, then everyone would be able to arbitrage profit which ofc is impossible.