Maybe it’s by chance, but then again, maybe it isn’t. On Tuesday, the 3-month implied correlation index finished at 7.8, just a tick above the 7.63 low it reached on July 3, 2024. Based on this, implied volatility for single stocks appears to be unrelated to the S&P 500.
What is particularly interesting is that on July 3, 2024, reached 160.71, effectively marking the high for the exchange rate. It fell for a couple of days, then returned to test that high again, only to fail. The rest, of course, is history.
The yen then strengthened materially across multiple currency pairs, and implied correlation rose just as quickly.
I don’t think this is happening by chance. I think there is a good chance this reflects the yen carry trade. In fact, if you take the 3-month implied correlation index and compare it with USD/JPY, the relationship is quite stunning over a 52-week lookback. The inverse relationship has remained very steady, though it has decoupled slightly more recently.
It is not to say that the yen carry trade is all going into the stock market, but a good portion of it could be contributing to this. At some point, the relationship will shift, as it has in the past, which could be especially true if it is no longer so much about the yen but more about the dollar. Right now, the dollar is strengthening against multiple currencies, and it is clear that the driver of the weaker yen is not so much Japanese policy as dollar strength.
This could prove to be crucial to that conversation, especially with Kevin Warsh speaking today at the ECB Forum and the jobs report on Thursday. A lot could change between now and then, that’s for sure.