Daily Chart of the USDJPY Compared to the Dollar Index. Data up to 12-11-2007
As you can see in the attached daily chart, the USDJPY is not consistently correlative to the USD Index. In the orange boxes labeled 1, 2 and 3, you can the see the USDJPY rising while the US index stays in a trading range or is going down.
This phenomenon can be explain as follows: The various financial players are becoming inclined to risk and are taking a lot of Carry-trade based funds to invest in Emerging markets and commodities. These same commodities, which are rising on the fundamental basis of a global growth story, with a big influence of china and India, are also driving the US Dollar down more and more.
Because of this depreciating force of the American currency, US Stocks are rising (not to loose their real values) and drive the whole equity global markets complex up. At Some point, this risk appetite abates and is replaced with the unwinding of some of the positions taken in the former cycle.
Now, how can we see this action and understand what is happening? In the lower part of the chart, you can see the relative strength of the USDJPY versus the US Dollar Index.
Note the following:
- After every period of non-correlation, we have a precipitous drop of both the assets (1, 2, 3 Violet boxes). Look how in our current and latest price action, the USD has gone down quite a while before the USDJPY joined him.
- Every time the Relative Strength is near the 0.25 level, we get a rebound of the USDJPY or a crash down. We are now at this level.
- The rising trend line of the RS has been always the last line in the sand where we could find a rebound of the Carry-trade. In view of the violent move down of these latest days we can speculate that the 0.25 would break and that a re-action could arrive when it will reach the ascending trend line.
- Look how the false break of the trend line, in August, created a panic selling in the USDJPY pair and in the whole risk oriented markets (Stocks, commodities, Currencies, junk bonds). If such a break would occur this time we could see much lower prices for EVERYTHING.
Disclaimer
By no means do any part of this article recommends, advocates or urges the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author and his company express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this article. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. The content of this article was created with the best known data at the time. The writer and his company are not responsible for the accuracy or completeness of the mentioned data. The writer is not a registered consultant of any kind and so the reader should not see any single part or the whole analysis as an advice for any kind of action in the financial markets.
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About the Author
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Moshe Shalom
Head of Technical Analysis Department
ForexManage Ltd
Site: www.forexmanage.com
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