One currency pair that many traders watch is the $EURJPY. It’s historically been correlated with equity markets and is a good proxy on risk taking in the marketplace.
Back in March, two weeks before equity markets rallied, the $EURJPY started moving up, perhaps signaling the rally. Since then the two have moved pretty much in lockstep – until recently.
Below is a chart (click to enlarge) showing how recently the two have diverged. The $EURJPY is selling off whereas the market has been trading in a range off the year’s highs
Surely, the $EURJPY can play catchup, and since the dollar has become the carry trade currency of choice old relationships may not hold. Regardless, this is a relationship to watch.
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Stats
December 17, 2009 at 1:20 pm
Great chart and great observation! I believe that the USD has de-coupled from the risk trade. We saw the first signs back in September when we got the first “not so bad” employment numbers. Now after several months of better jobs numbers, actual GDP growth, and even decent retail sales, the Fed has started to signal some hawkishness. And as such the USD has begun to trade with its fundamentals rather than with risk. My thinking is then that the JPY resumes its historic role as the carry trade currency. Equity traders better be prepared and not get caught up with the bulls – as the $EURJPY seems to be signaling. Great post.