This strategist says forex markets are flashing a warning signal for stocks

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Roger Bridges has been working in financial markets for more than 30 years. His current position as global rates and currencies strategist for Nikko Asset Management in Sydney gives him a broad vantage point across markets and Nikko’s own investment committee and asset allocation process.

From that vantage point, Bridges has had an opportunity to watch the battle that has engulfed markets in 2016 develop. And while he says that stock markets have recovered nicely from their recent lows, he believes that the recent moves in forex markets, especially the US dollar, Japanese yen exchange rate (USDJPY) is flashing a clear warning signal that stocks, and markets more broadly, are still at risk of another big leg lower.

Bridges said the price action in the aftermath of the Bank of Japan’s (BoJ) shock move into negative interest rate territory earlier this month, which saw USDKPY fall more than 10 big figures from 121.50 to below 111 in the space of a little more than a week, suggests markets are starting to think the BoJ has exhausted all its options.

After a brief recovery, USDJPY is back under 112 today after stocks sold off last night.

“It’s not just the risk aversion trade,” Bridges told Business Insider. “It seems to me that the price action post-BoJ reflects investors giving up on governor Kuroda’s ability to move the needle on the economy.”

That means that positions are being squared – yen bought – which has driven USDJPY lower again.

That’s important, Bridges says, because taken together with the euro’s relative strength in the run-up to the much anticipated next round of monetary easing ECB president Mario Draghi has promised for the March meeting, that suggests a lingering, and strong, risk-off tone.

Again, Bridges gets a sense that there is a growing feeling among investors that quantitative easing and negative rates aren’t working.

Which is the warning forex markets might have for stock investors.

The yen normally rallies in times of trouble and the euro has taken up that cudgel recently as well. So if traders are thinking quantitative easing hasn’t worked, if negative interest rates aren’t expected to work either, and if the global growth profile has taken a step lower then the rush to buy yen, cut positions, and even hold euro, investors at a macro level are betting things could still get worse for markets in general and stocks in particular.

But Bridges isn’t a flat-Earth stock market doomsayer, not by any stretch of the imagination. Rather, while he knows that stocks work best in the long run, he says that in the intermediate term the warning sign is “there might be much better levels to buy at some point this year”.

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