Who’s got it right? Currencies or stocks?

The currency and equities markets are sending two different signals

With the yen’s gains today, it’s certainly pushing the narrative from last week’s CFTC data further that yen shorts are being trimmed. More so that the report hadn’t yet incorporated the post-FOMC meeting movements.

But it is interesting to note a bit of a divergence in what we’re seeing currently in markets. Looking at the data last week:

We can see that net short positioning in yen contracts have been trimmed to their lowest level since June 2018. What stands out even more is if you drill down to how leveraged funds are positioned in the yen over the past few weeks:


Last week’s report showed that this is the first time since June 2018 that leveraged funds are actually holding a net long position in the yen.

The gains in the yen can perhaps be ascribed to a plunge in bond yields amid major central banks angling towards easing monetary policy but the yen also bears a traditional safe haven allure among major currencies. And one of the reasons that major central banks – in particular the Fed – is looking to ease is because of ongoing global trade tensions that is dampening economic developments around the world.

Yet, US equities continue to trade near all-time highs as we can see from the S&P 500:

SPX 25-06

It’s a conundrum that’s been a highlight over the past few weeks and one which market participants will have to clear up eventually.

While major central banks easing may be good for equities on the face of it, them doing so in light of a global economic slowdown isn’t something that screams optimism. However, if global growth can recover amid looser monetary policy, then perhaps the market optimism isn’t quite misplaced just yet.

At the end of the day, one of the two sides (currencies or equities) will be the ones who are right. But there’s no doubt whoever is the one caught on the wrong side will have some catching up to do in due time.

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