Japanese Yen Still Correlated to Risk Trends - Bearish Potential Remains for the JPY

The Japanese yen fell against most of the majors, but that was due primarily to gains in FX carry trades during the European trading session. Some of the JPY crosses have been moving in lockstep with US equities, as both the DJIA and EURJPY gained at the start of the US trading session and spent most of the day drifting lower. As we mentioned yesterdayrisk appetite still remains on edge and has not been helped by recent downgrades of the credit ratings of 18 US banks by S&P, especially as five of them were pushed into junk territory. S&P cited the notion that "[o]perating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision.” On the other hand, 10 banks have returned $68 billion worth of TARP funds, including JPMorgan Chase and Goldman Sachs, indicating that not all is equal in the banking sector at this juncture.

Ultimately, it’s undoubtedly positive that some of the nation’s biggest banks are returning taxpayer funds, but according to a press release published by the FDIC on May 27, their “Problem List” of troubled banks grew during the first quarter “from 252 to 305 institutions, and total assets of problem institutions increased from $159 billion to $220 billion.” As a result, it’s important to keep the situation in perspective, as there are still significant downside risks to the health of the financial sector and the economy at large.

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