Since we spend so much time looking at the yen and the euro compared to the US dollar, it made sense to compare the two to one another. The yen has been the primary driver of rising stock prices for several years, now.
Will the ECB’s much heralded entry of the euro into currencies’ “race to the bottom” change the equation?
As seen above, the pair has bounced back and forth in a very broad channel ever since the euro’s inception. In the early years of 95-98, the euro gained at the yen’s expense as SPX enjoyed an extended bull market.
When EURJPY topped out in 1998, SPX fell almost 20% over the next month, but recovered to make new highs 18 months later in Mar 2000. This began a period of inverse correlation that would last until Oct 2002, when SPX finally hit bottom after falling nearly 50%.
Once it did, a strong positive correlation resumed until EURJPY peaked again in 2007. This time, stocks peaked at about the same time. As SPX neared a 300-pt decline, EURJPY shot up to a slightly higher level before joining in the crash.
EURJPY bottomed out in Jan 2009, SPX in March. The correlation stayed fairly positive except that EURJPY’s two waves lower were matched by much smaller corrections in SPX — which was beginning to feel the full effects of the Fed’s QE.
When SPX (along with USDJPY) bottomed out in Oct 2011, it touched off a run of extremely strong positive correlation that lasted until December 2013. EURJPY topped out and began a steady decline that lasted into September, while SPX ratcheted ever higher.
Finally, on Sept 19, EURJPY reversed at the top of a triangle (below, in yellow) that had been forming since Dec 2013. Only, this time, it didn’t stop at 136 as it had several times before.
That momentary lapse, that brief bout of yen strengthening, was enough to send SPX 200 points lower by Oct 15 — a collapse that was only arrested by the announcement on Oct 31 that the Bank of Japan would extend and greatly expand its QQE and triple its stock buying.
EURJPY shot up almost 12% over the next seven weeks — which was all stocks needed in order to rally into the end of the year. Since mid-December, however, it’s been a different story.
The ECB officially got into the currency debasement game. A weaker euro sent EURJPY tumbling by nearly 15% by Mar 13, following the steep falling red channel shown in detail below.
EURJPY’s four bounces have produced bounces in SPX of 120, 71, 124 and 69 points. But, one gets the feeling that the rubber band is becoming rather stretched. In the past, SPX has eventually “caught down” with a plunging EURJPY. That falling red channel portends more of the same.
The USDJPY has already broken down from a very well-defined channel that dates back to Jan 13 — signalling a strengthening yen.
And, though EURUSD experienced a very fortuitous bounce after having fallen through the bottom of two channels of its own, the ECB is working to cheapen the common currency even further. The next major support is almost 10% lower.
In other words, there’s little reason to think that EURJPY will do anything other than continue its freefall in the falling red channel. How much longer can the divergence between it and SPX go on? Time will tell whether we’re in a 2000 or 2007-style bubble. Though, currency manipulation isn’t the only tool at central bankers’ disposal.
The rising red channel midline is still below at around 125.47. And, just underneath that, the white .500 Fib line at 121.93 might offer some support.
Below that, however, the next major support isn’t until the white Fib crosses the falling purple channel midline and rising red channel line at around 115.36 in late April/early May. And, the biggest target is down around 106 later this summer.
It should be an interesting summer.
continuing…