FX Signals Diverge as S&P 500 Rally Faces Key Resistance

The move in the markets today was somewhat surprising, given the size of the rally in a few names, along with what appeared to be intervention in the Japanese yen ahead of tonight’s BOJ meeting. Additionally, the Korean won continued to strengthen, despite it being a mild Treasury settlement day. Sometimes, however, news flow can be more powerful than mechanical flows, and today was one of those days.

The more interesting point, I suppose, is that the index has now been stuck below 7,450 since July 23, and that has remained the key level of resistance. At this point, a strong gap higher that clears resistance could lead to a rally back toward 7,500, ultimately filling the gap created by the decline on July 22.

One thing worth noting is that today’s rally created a gap of its own following yesterday’s sharp drawdown. In my view, those types of gaps are typically unstable and tend to fill relatively quickly.

Perhaps what matters just as much is that USD/JPY weakened materially today, in what appeared to be intervention, oddly ahead of tonight’s BOJ meeting. A surprise rate hike by the BOJ would likely be another shock to the market at this point and could lead to even further yen strength.

Since 2023, the 3-month implied correlation index and USD/JPY have been almost mirror images of one another. If that relationship continues to hold, it would suggest that implied correlation is poised to rise. That, in turn, would likely pressure dispersion lower and could weigh on the broader equity market.

Additionally, USD/KRW continued to weaken today as well, making the rally in the semiconductor sector somewhat unusual. No relationship lasts forever, but this has been a very strong signal over the past several weeks.

If the market has been largely driven by liquidity, and that liquidity is now being withdrawn, then the signal from the FX market does not support today’s move.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

BOJ (Bank of Japan): Japan’s central bank, responsible for setting monetary policy and interest rates.
Dispersion: An options strategy or market condition that benefits when individual stocks move independently rather than in unison.
Gap: A price area on a chart where no trading occurred between consecutive sessions, often acting as future support or resistance.
Implied Correlation Index: An options-derived measure estimating how closely stocks within an index are expected to move together.
Liquidity: The availability of capital and ease with which assets can be bought or sold without significantly affecting prices.
Mechanical Flows: Market movements driven by systematic trading, rebalancing, or quantitative strategies rather than discretionary investors.
Resistance: A price level where selling pressure has historically been strong enough to limit further gains.
Treasury Settlement Day: The scheduled date when newly issued U.S. Treasury securities are paid for and delivered, which can temporarily affect market liquidity.
USD/JPY: The exchange rate between the U.S. dollar and Japanese yen, often viewed as an important indicator of global risk sentiment and monetary policy expectations.
USD/KRW: The exchange rate between the U.S. dollar and South Korean won, frequently monitored as a gauge of Asian capital flows and semiconductor-related market trends.

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