The Japanese Yen is a leading indicator of major changes in risk sentiment. Risk Off periods, especially in global stock markets, are usually accompanied by a significant increase in the value of the Yen and the opposite happens during Risk On periods. When it happens, the moves are usually sharp and rather quick and would provide a confirmation of the dominant sentiment towards (systematic) risk.
A higher Yen price confirms we have started a Risk Off period where the general negative sentiment will make investors opt for safe haven assets such as the Japanese Yen, and move away from risk assets such as stocks. A higher Yen is also bearish for Nikkei, and could have an impact on other economies in Asia.
Therefore, investors would expect troubles ahead for stock markets in general if the Yen rises fast, and it becomes worse it if breaks above critical price levels. And the question becomes with the recent strength in the Japanese Yen, did we reach that crucial tipping point where the market has actually shifted from Risk On to Risk Off? And what price level should investor watch to confirm that the sentiment in the market hasn’t changed?
A quick scan of the financial media shows that there are associations of the rise of the Yen to multiple reasons, such as geopolitical risks, political scandals in Japan… While some might be true, we prefer to look for our answers in the charts and the global intermarket analysis. This method remains the best to eliminate the noise and stay as objective as possible.
Troubles in global stock markets confirmed if Yen goes above 100 points
The 5 Years chart shows that 100 USD is the crucial level that would signal a potential Breakout for the Yen and a Bearish turn for stock markets. As shown in the chart below, the Yen had a rather neutral trend in 2017 and is still in a neutral sideways movement that could lead to either a sharp breakout or breakdown. Right now, the path with the least resistance seems to be downwards however, investors should be very alert as the Yen is approaching the 100 USD level.
This happens at the same time as bonds are testing an important trend line, and Gold is close to a Breakout but not there yet. Even Oil is almost at a make or break level. So while we expect the upcoming weeks to set the tone for markets directions for the rest on 2018, we maintain a positive bias for stock markets in 2018. As for the Yen, the likely direction is a sideways that could lead to more downwards pressure especially once stock markets recover.