Stock market drives yen behavior

The US stock market has been a bell-weather for yen behavior during this economic crisis. This is at odds with the historical behavior between the SPX and yen which had shown negative correlation and a regression beta which was close to zero for the period prior to the crisis. Surprisingly, there is not a strong relationship between the VIX index and the yen even though the talk has been that the volatility measure is the key to measuring risk aversion. The SPX is proxying for US as well as global growth. Given the important relationship between Japanese exports and US growth it may not surprise many that there is a relationship; however, there is then the problem with explaining the lack of relationship during the early part of the 2000's. Of course, the size of the recent stock move could dominate the regression results.


This relationship between the SPX and yen is actually much stronger than what has been the case between yen and the NKY index. Given the high percentage of market capitalization in the NKY with exporters, it would seem logical that a fall-off in exports which drives down stock prices would show up in yen appreciation. The line of causality would not make sense. A fall in Japanese stocks would not cause a flow into Japan so it would not be expected that the relationship would be strong.

We like the SPX global risk proxy story right now, but the bias from the large move may suggest that there will be a decoupling between the two. Trading yen against short-term stock moves will be risky.