Long-time readers of this blog are already aware of MKTSTK’s borderline obsession with the Japanese Yen. If this is news to you, feel free to acquaint yourself with my viewpoints on the carry trade.
Long story short, the Yen is connected to every market via the plumbing laid down by the broad swathe of market participants performing some flavor of the carry trade, thereby creating a synchrony of risk. The way this population of traders responds to the swings in their shared collective PnL creates flows from the Yen into other related markets, including the S&P 500.
To illustrate this point, we plotted the daily closes for the Yen (via FXY as a proxy) against the VIX (spot). It suggests that, more than ever, traders and investors should be watching the Yen for signs of danger and safety. If the Yen is spiking then watch out for a volatility shock. Everyday the Yen stays stable or goes down, look for conditions to ease and volatility to subside.
H/T to Rooster360 for starting this conversation, MKTSTK is a long-time reader of his blog, check it out
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