The Euro-Yen cross is a popular proxy for risk, because of the Yen's status as a funding currency of choice in the carry trade--that is, you can finance positions by borrowing in Yen and investing in higher-yielding instruments. Above is a graph of EURYEN vs. S&P500 over the past two years; the Yen has strengthened versus the euro recently on the back of Europe's sovereign debt problems, and with it the S&P500 is falling. If the Yen carry trade is unwinding, we should expect weaker equity markets going forward.
It is interesting to note that EURUSD (below) vs. SPX is registering a similar effect--despite its ugliness, USD should be a major beneficiary of any risk events in 2010.
Finally, what of USDYEN (at 89.19 now)? Japan is still suffering from a significant output gap, challenging demographic trends, and self-feeding deflationary expectations. The Bank of Japan seems set to maintain its base borrowing rate at near-zero levels; if so, then the driver of the USDYEN cross should be US rates. If the Fed does not raise rates in 2010, then USDYEN has likely seen its bottom. If it does, then USDYEN at its current level could be a good buy.
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