On a purely directional basis, the dollar-yen exchange rate has become highly correlated with both the S&P 500 and the Dow Jones Stoxx 600.
Key Quotes:
"This is what one would expect to be the case if the yen was used as a funding currency. Over the past 30-day, the correlation between the yen and the Dow Jones Stoxx 600 is near 0.88. It was inversely correlated in July and had approached correlation levels in May and June.
The correlation of the S&P 500 and the dollar-yen exchange rate on a directional basis (correlations conducted on the level of the S&P 500 and the dollar) is near 0.82 over the past 30 days. It had been inverse from early June through mid-August.
The strong correlation between the dollar-yen exchange rate and the S&P 500 and the Dow Jones Stoxx 600 is consistent with what one expects if the yen was used as a funding currency to buy shares. However, the hypothesis breaks down when it comes to emerging market equities. The correlation between the dollar-yen exchange rate and the MSCI Emerging Markets equity index -0.25 over the past 30 days and -0.54 over the past 60-days. One potential explanation is that while the yen is used to fund US and European equity purchases, it is not used to fund emerging market equities. The dollar may be used to fund such purchases.
The JPY108 area held back in April. Last year the greenback briefly traded below JPY100. A break of JPY108 would target JPY107.25 initially, but the JPY106.50 area may be of greater technical significance. The correlation between the dollar-yen exchange rates and US 10-year yield appears more stable and just as strong as with US and European benchmarks (30-day 0.84, 60-day 0.73). The correlation between the dollar-yen exchange rate and the US 10-year yield is more robust in that the correlation between the percent change of each is also highly correlated ( 30-day 0.84, 60-day 0.75).
Geopolitical anxiety tends to be intense but short-lived. That seems to be what the price action of the Korean won and Korean equities is suggesting as well. In the medium and longer-term, the dollar-yen needs higher US interest rates to find better traction."
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