Yen Carry Trade May Be Driving Low Implied Correlation Again
Liquidity is due to thin out as we enter the second half of 2026, and at Navigating The Market, one of the things we focus on is changes in liquidity. Now is the time to join.
The Independence Day Sale is now live.
30% off Monthly and Annual subscriptions, permanently. Subscribe before July 5 at 11 pm, and the discount locks in forever. Not for a month, not for a year. As long as you stay subscribed.
If you’ve been following along and thinking about going paid, this is the week to do it.
Maybe it’s by chance, but then again, maybe it isn’t. Today, 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, USD/JPY 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 tomorrow at the ECB Forum and the jobs report on Thursday. A lot could change between now and then, that’s for sure.
-Mike
Glossary by ChatGPT
ECB Forum — An annual European Central Bank conference where policymakers and economists discuss monetary policy and global economic developments.
Implied Correlation Index — A market-based measure of the expected average correlation among stocks derived from options prices.
Implied Volatility — The market’s expectation of a security’s future price volatility as reflected in option prices.
USD/JPY — The foreign exchange rate showing how many Japanese yen are required to purchase one U.S. dollar.
Yen Carry Trade — An investment strategy that borrows in low-yielding Japanese yen to invest in higher-yielding assets or currencies.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.