Forex: USD/JPY – Correlation with Nikkei stock index

on Jun 6, 2013

Since Wednesday the yen has started to gain against the greenback in advance of the US mortgage applications numbers and ADP employment change figures for May being released, potentially supporting downside movement for the pair.

Yesterday, it fell from 100.46 in early European morning to 98.96 later in the American session, with the weak US updates already affecting the quote.
Ahead of today’s European opening, the greenback regained some losses, as the pair rose to 99.46, but it has since retraced again to 99.08/11. The day has started with a data update from the Japanese Ministry of Finance showing that foreign investment in Japanese stocks and foreign bond investment in May showed declines.

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Recently, the fall in Japanese equities has strengthened the yen, with traders following the movement of the Nikkei share index.
The Nikkei had surged by some 80 percent between November and late May.
The situation gets confusing, with Japanese Prime Minister Shizo Abe confirming yesterday the current monetary policy of the BOJ will remain unchanged not being accepted as bad news by the markets as it was when BOJ officials first announced it will buy more than 7 trillion yen of bonds every month.

The announcement last month provoked a depreciation in the yen to its weakest level against the US dollar since October 2008.
However, the dollar-yen now appears to be in negative correlation to the stock market, with the yen strengthening every time the Nikkei falls.
At the end of last month a report from Reuters, which hinted the Japanese government is about to urge the nation’s public pension funds to increase their investments in equities prompted a 1.6 jump in Nikkei futures. This was enough to help the dollar to gain 0.5 percent against the yen.
Sooner or later, this pattern between the USD/JPY and Nikkei stock index is expected to break, but with the dollar recently weak the yen remains strong.


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