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THE CORRELATIONS CORNER: USD/JPY vs. Nikkei 225

Updated Dec 28, 2012 4:20:00 PM By Chris Tevere, CMT

Backdrop:

Whether you’re an experienced trader or brand new to Forex, you should be aware of the strong positive correlation between Japanese Equities & USD/JPY. This historical intermarket relationship is predominantly due to the fact that the Yen has been known as the classic “carry” currency – Since Japan’s interest rates have been low for several decades, it has made it an attractive currency to borrow in and then turn around and invest that money into not only higher yielding currencies, but also equities. Thus, we tend to see USD/JPY trade roughly in-line with Japanese equities. Often I find an intra-day overlay helps ease the transition for experienced traders (in these alternative markets) into the world of FX or simply help newer traders formulate a view based upon a market which they may already feel opinionated about.

While many like to cite this relationship over the long-term, we believe watching the intraday relationship is sometimes more pertinent, especially of late. The chart below depicts USD/JPY vs. Nikkei 225 futures from 7pm ET yesterday until 1pm ET today, since this is when Japan’s equity futures are most active, and as you can see the two are nearly indistinguishable (Correlation = 0.8443). Now, this doesn’t guarantee if the Nikkei2251 moves lower over the coming days that USD/JPY must trade lower as well (or vice versa), but it does suggest this should be the relationship between the two.

Thus, if you have an opinion on the direction of Japanese equities over the coming days/weeks or even intra-day, USD/JPY could be a vehicle you may want to consider to express that view. Technically speaking, the Nikkei2251 broke to fresh 2012 highs and is trading at levels not seen since March 2011. Meanwhile, USD/JPY has taken out its previous 2012 (84.20) and 2011 (85.50) highs over the past week. Consequently, a test of the longer-term 23.6% retracement around 86.85/90 (using the 2007 high & 2011 low) could be in the works over the coming days.  

1 Reference is for informational purposes only and is not offered to US clients

Chart Source: Bloomberg, FOREX.com 

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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