The JPY crosses and the SP500

On Friday I mentioned that my bias on the SP500 is to the upside based on the weight of Technical Arguments, however I also said that I have not been participating in this rally as I had a number of concerns.  I did not think Friday's payroll produced a set of data worthy of the reaction, though the market seems to favour poor data almost more favourably than better data as it suggests more likelihood of QE2.

One other concern I have, which I did not mention last week, is the most recent performance of the EURJPY and the AUDJPY FX crosses. I consider these two crosses as key barometers of risk-on v risk-off. They fell sharply with the stock market in 2008 and rallied well in early 2009 as the stock market turned, though the EURJPY rally fizzled out through the remainder of 2009. Through this year their moves have been quite well correlated in direction (if not magnitude) with moves in the SP500, however as the SP500 has rallied recently, these two crosses have started to stall out again. This can be seen on the next couple of charts, the first charts show the SP500 v EURJPY, note how the price has fallen out of the recent rising channel on the EURJPY, the second charts show the SP500 v AUDJPY, the AUDJPY has been in a big sideways consolidation for three weeks now.

I make these points as observations at this stage rather than suggesting we are about to go into full scale reverse on the SP500. The AUDJPY though is interesting in particular, and I think any sustained breakout of this consolidation may offer some clue as to which way the SP500 may head, and should therefore be watched closely.

Just to reflect my confusion as to the bigger picture, I am posting the some charts of 5 year Credit Default Swaps form Italy,Spain, Ireland and Greece. These seem to be suggesting that fears with regard to these may be easing, given the recent Euro strength this is probably not surprising, still if this continues it should suggest less risk aversion. It is however possible that fears surrounding the PIIGS issue could be a red herring, as in general this has not had a high correlation with the fortunes of the SP500 other than during the period of May-June this year.