EURJPY Correlation with the EURO and YEN - Data up to 01-15-2008

Many times traders like to know WHY a pair is moving the way it moves. When you have a pair that represents a ratio between two major currencies, like in this case the Euro and the Yen, there is, at times, a tug of war between the conflicting influences.

The European currency is in the camp of the Anti-USD complex, comprised of all the currencies that move contrary to the US Dollar. Like Gold, GBP and others, the Euro is very much prone to the decision of the FED on interest rates, economic news about the US and the grave situation in which the US financial institutions are finding themselves these days.

On the other hand, the USDJPY is the main Asian Carry Trade currency. The differential between the interest rates on the Japanese Yen and the US dollar has caused many players to take loans in yens, selling them and converting them to the currency they invest in. At first, they bought the currency itself, then government bonds and corporate bonds. Finally, we could find these type of Carry Trade oriented investments in the commodities space and equity markets. Many have also leveraged their bet by 10, 15 or even 20 times over.

This phenomenon was good and proper in two conditions: the rates for the Yen stay low and the value of the Yen in the Forex markets stay weak. The first still apply but the second is no longer true. The USDJPY is moving lower by the day (107 at the time we write these lines). When you have stocks and bonds (junk, municipals or corporate) going down because of the weakening economy and the Yen going up, the pain is becoming unbearable and the players want to get out of this double whammy, quick.

So, what is the part influencing more the EURJPY? The Anti-USD complex or the Carry Trade complex? To answer this question we created the chart attached. In the upper part you can see the prices of the EURJPY (Green) and its siblings: EURUSD (red) and USDJPY (Blue).

It is possible to notice at first glance that from October last year (Orange line) the chart of the EURJPY is better suited with the Yen than with the Euro. But we want a more mathematical proof. It is given by the lower part of the chart where you can see the correlation (21 days) computed. See how the blue line is staying between 1 and 0.5 at all times (Very good correlation) and how the red is under the 0 line most of the time (Very bad correlation). The blue line is of course the line representing the USDJPY.

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

Moshe Shalom Head of Technical Analysis Department ForexManage Ltd Site: www.forexmanage.com Email: This email address is being protected from spam bots, you need Javascript enabled to view it