USDJPY dropped over 1.25% overnight, so the e-minis (thin purple line) followed right along — to a point. Note the floor under ES that corresponded with USDJPY reaching the purple .618 and white channel line on the 60-min chart below.
As we’ve pointed out for the past several weeks, the white .618 is a major Fib retracement. Any meaningful drop below it — such as we’re seeing right now — represents a real threat to the carry trade which has fueled virtually all of SPX’s gains since late 2011.
The floor (yellow arrow) established under USDJPY for most of 2014 provided regular boosts to ES/SPX. And, when USDJPY finally broke out of that triangle in July, SPX soared to new highs.
The mid-October stick save in SPX (thank you Jim Bullard) was facilitated by USDJPY’s backtest of the January highs (and, an important Fib.)
And, stocks’ subsequent breakout to new highs was made possible by USDJPY’s massive Oct 31 move (thank you Kuroda and Abe.)
Looking at the weekly chart below, it’s pretty easy to see where the BOJ’s massive easing began. Remember the meltdown of July-Aug 2011?
I wasn’t really watching USDJPY back then, as it was generally in freefall even before Fukushima (the purple arrow.) But, that floor established by the BOJ at 75 was the very start of the yen’s decimation and an extremely successful campaign to boost stock prices.
As one of the only analysts to accurately forecast that 23.8% correction, it never occurred to me that the failure of SPX to reach my 1040 target (SPX fell from 1370 to 1074) was greatly influenced by the Oct 31, 2011 spike in USDJPY — the largest since 2008 and one of only two that exceeded the Oct 31, 2014 spike. Hmm…