Fear guages, the USD Gold and the Yen and new divergences and correlations

Trading Discussion News and Economy
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So, I’ve noticed both gold and the DXY (USD) climbing in tandem lately. Normally the two are divergent. I have also noticed that the usually safe haven of the YEN seems no longer applicable (at least in the short term). Does anyone think this could see a big change in the dynamics of the markets going forward?

See the graph below, in what I’ve hopefully made clear:

XAUUSD-historical-divergence-convergence
XAUUSD-historical-divergence-convergence1828×988 193 KB

I’ve also noticed a recent news article mentioning how a massive Japanese fund has been selling the Yen with help from China (Article link here). It cites concerns over China and Japan with the Yen becoming a safe haven currency over Corona virus fears. Then this news today, seems that all the other funds are following suit Reuters news article.

So, in summary there is currency manipulation by super funds, like China. There is the long term implication of the virus on the Asian economies and a trade war battle between China and the US. Now we are seeing the Yen failing as a safe haven currency and what looks like the USD becoming the new safe haven currency, as indicated by the XAUUSD correlation.

Does anyone else agree or disagree that there is a major change coming into play here on the long term? How could this impact on the macro economic front? And finally, how could we make big Moola from this?

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Thanks for sharing this info with us.

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Interesting take from FXStreet.

What we do know is that Japanese FX market participants are not treating the yen as the usual safe haven. This is not likely an actual capital outflow but rather a pullback from hedging. Whatever it is, it’s Big. There is some possibility, not yet on the radar screen, of the dollar/yen returning to 125.76, the recent high from June 2015. That’s the worst case scenario (i.e., Japan gets the epidemic).

What does that mean? Dollar strength and money into US equities or bonds? Not-the-dollar, and not-the-yen strength, so more gold?

I think the timing, or rather, how long the virus impacts China, and indirectly the Japanese economy, will tell us what happens to the safe haven status of Japan, I’m sure the BOJ will also get involved

Some more FX related opinions:

As highlighted in JPY: Three drivers behind the fall, we think the recent rally in USD/JPY to 112.00 has mostly been driven by a combination of: (a) markets shifting from short-term global pandemic fears (JPY-positive) to pricing in the impact of a Chinese slowdown (JPY-negative, given Japan-China economic ties); (b) a quickly deteriorating economic outlook for Japan, especially after grim growth data for the fourth quarter; and © speculation around increased outflows from Japan as funds look for more attractive yield abroad before the end of the financial year (March). According to our short-term financial fair value model, the USD/JPY looks stretched, suggesting that the move of recent days may be overdone and some stabilisation in USD/JPY lies ahead.

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Risk is revolving around the economic impact of the China virus effect - sometimes good to look at the bond market for guidance on market risk thinking and then take it from there.

Market high on Wed evening spx - so buy some more - risk is on big time.

Gold also on the up on Wed … but forget that - it’s been on the up in tandem with spx since the open this week (tue)

Yen was doing little Mon with US close - Tue flat, then wed sell in tandem with spx - all sounds neat, who needs yen - buy the risk.

Was there anything mid week - they were buying oil wed, even the US2000 and the techs in the Nasdaq,

The bond market didn’t buy the risk, look at wed us10yr vs udsjpy or vs spx etc.

Crises come and go and risk will alternate

.

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I might not be understanding you correctly, but some of what you said is partly my point.

So Gold is risk off, SPX risk on, both climbing.

US 10 yr at near record low (friday) 1.52 (ticker DGS10), I’m quite new to bond but from my understanding, the lower the rate the more risk off, buying bonds pushes up bond price, thus ratio of return goes down?

So from what I can see in summary:

SPX up - Risk on
US bond rates down - Risk off
Yen down - Risk on (but might be false signalling due to potentially being manipulated by mega funds)
Gold up - Risk off
Oil - Up all last 2 weeks except Thur Fri, overall down trend since 2020 - Risk on or off?
Dollar index DXY - Risk off

So just from that I might be concluding that, after removing the yen as a false indication, possibly oil mixed, all the rest are risk off, just the US markets. Maybe US markets are in danger area?

Or alternatively, risk off is overblown, US bond rates will rise, gold will fall and dollar will sell?

Lots of commentators and analysts seem to be saying (and so too of the companies, such as apple and other manufacturers) that the impact will be having an appreciable impact that will be noticed in the next quarterly results, as supply chains get interrupted.

My assumption would be that more is to come, especially with US markets at record highs. Therefore could we see risk off as the current indicator for the next 3 to 6 months and everything else is a correction or bubble?

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Aye the market got a little spooked on this:

https://www.markiteconomics.com/Public/Home/PressRelease/2ea84928c5d74262bbe387ec2b19d337?s=1

Check out the comment on P2

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Hi Quadricolor.
I just got done reading a very interesting article, and I definitely wanted to put this out here somewhere in B.P.'s. So… I’m searching around and found your thread here.
Perfect place for it.
Check it out.
https://seekingalpha.com/article/4326097-coronavirus-to-hammer-japan-and-yen?ifp=0&utm_medium=email&utm_source=seeking_alpha&mail_subject=coronavirus-update-turning-point-is-showing-up-in-china&utm_campaign=nl-macro-view&utm_content=link-23

Well, I would be interested in carrying on a conversation about possible changing market dynamics that might be coming.

In any case, yeah, what happened this past week, with the Yen, was BIG. We’ll have to keep this in mind to see whether they will ever go back to the risk-off go to currency. Right?

Tell me what you think of that article.

Mike

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I’m watching you discussing and don’t understanding much. But it looks really serious.
I’ve been studying Macro, but not on this level - to take intepretations - yet. In each line I had learnt something new:

  • @Quadricolor noticed that DXY and Gold began to converge ! I even didn’t knew how to use this correlation. I don’t know yet… but now I know that this exist.
  • I’ve found that JPY is a secure currency (safe heaven) and now it makes sense why there is so much volatility.
  • Mrs. @MikeWolski share this article. And, than ! Another surprise: more than 60% of foreign reserves is applied in JPY !

Thank you guys to open this discussing and share your (professional) thoughts here.

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I think much of the gold buying might be in Asia in response to the virus, as of cut off date last COT wasn’t responsible.

We will see for sure on Tuesday in the COT.

If the buying was out of Asia there s a chance this move in Gold won’t hold.

US stocks were going up - I mean where do you put your money these days?

The S&P often attracts flows when Asia markets get flu (bad joke sorry).

But we could have a bad opening Monday after the sudden contagion in South Korea

In all my years of trading this is one of the most interesting for sure.

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Hey guys…
Here’s another good article explaining about the JPY.

Raphael…read up.
This is knowledge.

Mike

P.S. - Thanks to Ivan Global Prime for this article.
I just think it belongs in here, also.

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I think it is not surprising that a currency, which is well known as safe haven asset will lose this status, if there is a heavy external impact on the economy and society. If corona spreads over Japan- no doubt, there are better safe havens than Yen.

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Hey guys.

Well, you got me at JPY. Cause:

  • This is my currency
  • I trade this currency as a whole (and only this currency)
  • I monitor, track, and keep detailed daily records of ALL of them
  • Out of all the top 8 currencies, this is my most focused one

Therefore, I hope you don’t mind what I have to mention here. But lately, I’ve had to ask some questions. And do some research to find the answers. I think you guys might be interested in what I’ve found (surely was for me).

First off, just know that I have kept detailed records of how these 8 currencies have related to one another. We’re talking end of day (daily) relational data. Since the start of 2019. Therefore, I can go back to my very own spreadsheets (excel) and come up with some answers to some very good questions. Let’s begin.

  • How big was this move from the JPY?
  • If we compare this to other big moves, can we learn something?
  • Have we seen something similar to this?

Hopefully you can understand where I am coming from here. What I’m trying to do here is put this into some kind of perspective. Surely, there are fundamental reasons behind all of these moves. And they will all be different. Right? But technically speaking, there should be no reason why we can’t go back in time to see to what extent this compares to.

I’ll have 4 major groupings here that I’m gonna compare.

  • JPY one day move, in pips and in %.
  • For context purposes, consecutive days worth
  • I’ll mostly compare JPY selling only (as opposed to JPY buying)
  • Market correlation similarities/differences

So, we’re gonna walk back in time. But we need to start with what happened last week.

FEB 19 '20 - JPY sold off

  • -905 pips ( Total amount of pips from all 7 JPY pairs ) // -10.72%
  • -1145 pips (2 day total Wed, and Thurs) // -13.24%
  • JPY was technically in a bull market but switched to bear this day. And fundamentally we’ll call this the virus cause.
  • The USD +5.22% for these 2 days (not normal)

FEB 4 '20 - JPY sold off

  • -632 pips (1 day) // -7.76%
  • -688 pips (2 days, 4th & 5th) // -9.16%
  • The JPY is technically in a bull market, at the top and coming down now. Over extended. This was on a Tue. and Wed., approaching Feb NFP.
  • This is correlated to risk-on/risk-off. The AUD and CNY most bid.

DEC 12 '19 - JPY sold off

  • -455 pips (1 day) // -6.30%
  • -942 pips (over 5 consecutive days, 12:9-13) // -10.41%
  • The JPY was in a bear market. Just a complete week of Yen selling, with Thursday being the most.
  • Risk-on/risk-off correlated. The AUD,NZD,CNY most bid.

OCT 10 '19 - JPY sold off

  • -678 pips (1 day) // -7.21%
  • -1468 pips (3 days, 10:9-11) // -16.24%
  • The JPY switched from bull to bear market this day.
  • The JPY took the other side of a very strong GBP. Brexit related day. Also, the JPY was grouped with the other safe havens - USD, CHF.

SEPT 4 '19 - JPY sold off

  • -732 pips (1 day) // -7.41%
  • -1145 pips (2 days, 9:4,5) // -11.65%
  • The JPY switched from a bull market to bear this day.
  • The JPY correlated with the USD and the CHF. Also the GBP was on the other side, being bid up high. Agrees with risk-on/risk-off.

-NO MORE BIG MOVES FOR JPY SELLING- That’s for the rest of last year.

But, there was some big moves for JPY buying, though. I’ll just mention the biggest one. If you remember, this was at the start of last year. It was called the "JPY FLASH CRASH"

JAN 2 '19 - JPY bid up

  • +1009 pips (1 day) // +8.19%
  • From what I remember, this was a restructuring of some sort. Kind of like a one-off event. This wasn’t an across the board consensus move, because it was an immediate turn-around from that point forward.

I lied. There was one more JPY big move selling day. This came about 2 days later.

JAN 4 '19 - JPY sold off

  • -834 pips (1 day) // -9.63%
  • This was on NFP Friday. So, between that and all of the catch up from earlier that week, this explains the big move.

Ok. Well, I hope this puts things into perspective. About what happened last week. All you have to do is compare the numbers, to then.
Let me help.

  • Only that turbulent first week of 2019 compares to last week.
  • Risk-on/risk-off has always been the correlation, except last week.

Look. Just like anything, in the market, we need more time to play out and see more of the picture. Right? I’ll throw out here the questions I will be continually asking myself.

  • Is the virus the cause?
  • Is this a catalyst that exposes the real vulnerabilities of Japan?
  • Will there be other catalysts?
  • Is this a fundamental game changer? Economics over Technicals?
  • Is this just a short term change or a longer term change?

We’ll know everything as time plays out.
Talk to me.
Mike

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When prices get extended then a certain nervousness creeps in, investors by definition already have the cash - it’s just that they want some more.

Lately the market has been buying bonds and in tandem buying stocks - mostly have been shrugging off the virus.

20 years ago was the same, the tech stocks didn’t stack - p/e ratios were out the window - investors just wanted to be on the ladder - until the day that the little boy pointed out that the king was naked.

Are stocks at that point right now? - I don’t think so - the virus scare will fade, the US election will come and if Pres Trump gets back in which seems more likely then there’s more steam left.

See that wee push up on the 10yr - it broke the 19 high and backed off Usd/jpy tried the same - clearly a decision time - my guess is that the money is not yet really scared :slight_smile:

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Yes, I’m happy to carry on the conversation of this topic, exactly why I placed it here. The article is a good one, I read it yesterday and it raised further points I wanted cook in the mix.

What struck me is the fact that Abenomics appears to be failing. Further though, I can see the potential that the BOJ, Prime minister Abe and the Japanese state pension fund may be coming to the realisation that things may get real bad (as painted by the article) quite soon. In order to protect the pensions of millions of very hard working Japanese, they are starting to shift money out of Japan and the Yen (my speculation).

There are other factors I’ve just been seeing. @Johnscott31 Yeah, there is definite gold buying on the back of Covid fears, and also from the middle east Covid and potentially oil revenue investments. Gold is also often bought by the middle eastern entities when they get good prices for oil. Oil has recently fallen quite a bit and then rising (70’s to 50’s - brent). There is some correlation between oil and gold prices. Gold remained stable while oil fell, but just after oil rising last 2 weeks gold surged. We could see some buying action in gold from oil receipts to, adding to the complex picture.

But yes, a good article, presenting the argument that Yen is not going to move back into safe haven status anymore. Who’s going to buy the Yen if institutions are going to avoid it? It’s definitely added to the soup of information.

@MikeWolski Yes, that definitely belongs here. Good article, thanks.

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No problem, great to hear there is so much interest!

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Thanks for your input, it is greatly appreciated. To break into this a bit deeper, the big moves of the last few days are big and point to certain drastic moves.

Yes, these are some of the question I’ve been asking, however I was pointing out that perhaps the market has been playing out already from about September 2018 where gold and Yen have been aligning? So maybe there where other things already happening quietly and the Covid is just a catalyst that is highlighting more to come.

Also, many medical experts are expecting Covid not to be easily contained. According to my own extrapolations Covid is increasing at a steady rate outside of China… the Genie is already out the box. It’s one thing for China, America or modern developed countries containing and managing the virus, but how about developing nations? I think Covid is going to get much worse before it gets better… but that is mathematical speculation at the moment.

Is this though a grand bullish pendant?

usdjpt-pendant
usdjpt-pendant1274×602 48.5 KB

So yes, I think it is a game changer, I think it has already happened and will continue to unwind. One thing is for sure, things are going to get busy. US trade war, Covid, Brexit etc etc. It looks like Bernie Sanders is taking the lead, thus I think odds of Trump staying in power higher, therefore more of the same. He rails against a strong dollar, what’s he going to do to intervene in Japan with the Yen falling and Usd strengthening? Also, like pointed out above

If there is no safe haven why not put it in what seems to go up for ever and make money too? And as @peterma pointed out

stock prices might not be too high… yet. So the last few days big moves might just be alarms pointing to new directions. I agree too that Pres Trump is likely to be re-elected, thus a bit more steam before the pop.

So, more money into USD via stocks and bonds? I think so, we could see continuing US indices rising, USD strength, and low US bond rates. Meanwhile european indices variable, weakened Euro and for sure weaker Yen and Asian equities. Also Gold being supported. These are my long term guesses over the year.

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Major carnage at the open today, even us stocks are bleeding big time

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Def interesting times.

In the short term the bond rates are poor so buying there could slacken.

Note how price has been on the rise since this virus thing hit the news, so watch out for any changes there. (i.e. US Bonds)

In the short term today was to the risk script perfectly - even WTI chipped in - now the thing is tomorrow is Tuesday and there are a bunch of gaps from this morning and WTI is suggesting a little buying so I’d be wary of chasing risk right now.

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Ok, thanks Mrs. Wolski.

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Right here is where I was wrong - living in the past.

Happens to older folk - the phenomenon is known as ‘Turnaround Tuesday’ - learners will have to google it.

So what did happen on Tuesday - well in the European session everyone was mindful of the possibility of turnaround - excluding Asia that is - they kept buying Yen.

That failure set the scene for the rest of the week - sell the risk.

Personally I didn’t give up until yesterday morning - then it was simple just to sell spx at max - the chance of a bounce was scarce.

Thinking ahead for next week the chances of a bounce will increase based on the virus news, Sunday will tell more - meantime flat.