We see a very interesting opportunity on a rare pair of JPY/XAU. Here, JPY is taken as 1 Lakh yen while XAU is the spot price of gold. This pair has been hitting new 15-year lows practically on a daily basis. As of now the ratio is at 0.2704. As recently as August 2018, this was trading at 0.763. This pair has been moving down for many years but the move in recent 2 months was particularly sharp and we believe the pair is bottoming out and will roar back over next 4-5 months. The current extreme readings have happened as gold prices skyrocketed in the last 2 months while JPY has got clobbered in the same way because of the rise in US bond yields. Historically JPY and gold have been positively correlated and have moved in the same direction, but this relationship has completely broken down of late. We believe JPY/XAU could climb back to 0.35 levels over next few months which would translate into a move of about 28-30%. The triggers for this could be a fall in global equities which could cause safe haven flows into JPY while gold may not go up as this global risk-off could be accompanied by a rise in dollar index which could be negative for gold. This could also happen as gold is extremely overextended and would have a tendency to correct over next few months as consumers buy less of gold jewellery because of high prices and also the probability of job cuts globally which would erode the buying power of households.

Conclusion

The current landscape underscores the need for vigilance among investors as market uncertainties persist. The heightened interest costs faced by junk-rated US companies highlight potential risks within high-yield debt investments. With leveraged loan default rates on the rise and debt-service coverage ratios declining, there are clear indicators of financial strain among borrowers. Despite buoyancy in credit markets, recent market dynamics suggest underlying apprehension, particularly as loan prices experience significant declines following the Federal Reserve’s actions. Historical precedents also indicate the importance of monitoring the loan market for early signs of economic shifts. As investors navigate these challenges, maintaining a keen awareness of market indicators and trends will be crucial in mitigating risks and identifying opportunities in an uncertain environment. We believe this is one of the leading indicators which could point towards an equity bull market getting vulnerable as we get into the H2 of CY 2024.