Trading Nation

This currency could be sending a warning sign for stocks

Key Points
  • The Japanese yen's relationship to the greenback may be signaling a warning for stocks.
  • The dollar dropped in Friday trading to 108.71 against the yen, its lowest level since mid-November.
  • Some strategists see further downside for the dollar/yen.
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Finding a key level for the S&P–in a chart of the yen

The Japanese yen's relationship to the U.S. dollar may be at a critical level, potentially signaling a warning for the equity market.

The dollar dropped in Friday trading to 108.71 against the , its lowest level since mid-November. Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said the dollar/yen broke a crucial level to the downside when it slid below 110 this week.

"I think that's a very, very serious sign suggesting that risk-off is really starting to permeate through the markets because in my opinion, yen always leads the markets in terms of risk-off sentiment," he said, adding that fear first appears in the currency market and then "spreads" into the equity market.

Schlossberg pointed to investors growing increasingly concerned about geopolitical uncertainty particularly in Korea, about the general tightening of credit conditions, and "the fact that there is very little progress on the reflation front out of D.C."

"We've had a big disconnect between what the currencies have been saying and what the equities have been saying, and I think now we're reaching a breaking point where the currencies are really signaling that equities need to come in and correct," he said Wednesday in an interview on CNBC's "Trading Nation."

Chad Morganlander, portfolio manager at Washington Crossing Advisors, echoes Schlossberg's sentiment concerning the yen triggering pressure on equities. He said the dollar/yen could fall to 105 over the next three months, and calls the "frothy" at these levels.

Along with the yen, the long end of the yield curve is also pointing to the economy not accelerating as much as the market expects, Morganlander said.

The greenback fell to its 200-day moving average against the yen in early trading, observed Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman.

"The subsequent stabilization looks fragile, and the JPY107.90 area may be the next target, which corresponds to a 61.8% retracement of the rally since the US election," Thin wrote in a note to clients on Thursday.