THE CORRELATIONS CORNER: AUD/JPY and S&P500

THE CORRELATIONS CORNER: AUD/JPY and S&P500

Updated  Oct 17, 2012 4:45:00 PM Written by Chris Tevere, CMT

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Backdrop:

Whether you’re an experienced trader or brand new to Forex, you should be aware of the strong positive correlation between U.S. Equities & AUD/JPY. This historical intermarket relationship is predominantly due to the fact that the Aussie is considered a ‘high beta’ currency, while 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 currencies which have a higher yield (ie: AUD, NZD). Consequently, when pairing the two currencies together, we tend to see AUD/JPY trade roughly in-line with other major ‘risk markets’, namely U.S. 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.

Rather than illustrating this relationship over the past day, I wanted to show the AUD/JPY vs. S&P500 futures overlay since the FX market opened on Sunday night (5pm ET), as I feel the extra time could provide a greater educational benefit. As you can see, over this 3-day period the two are nearly identical (Correlation = 0.9381). Now, this doesn’t guarantee if the S&P500¹ continues to head higher over the coming hours/days that AUD/JPY must trade higher as well (or vice versa), but it does suggest this should be the relationship between the two.
Accordingly, if you have an opinion on the direction of U.S. equity markets over the next few days, weeks or potentially even intraday, then AUD/JPY may be a pair to use to express that view. Technically speaking, the S&P500¹ bounced ahead of the key 1425 level – Convergence of the 50-day sma, August 2012 high & 23.6% retracement (of the rally from the June 2012 lows), and presently looks poised to retest it’s prior 2012 highs between 1470/75. Interestingly, AUD/JPY never saw a daily close below the highlighted Head & Shoulder neckline from last Monday – See TECHNICAL UPDATE, and has rallied very strong since – Taking out the 50 & 100-day sma’s and top of the daily Ichimoku Cloud in the process. Currently, the AUD/JPY is trading just below the 200-day sma (82.10/15) and should that too fail to contain further gains then keep an eye on trendline resistance (drawn from the August high) around 82.40/45 next.
¹ Reference is for informational purposes only and is not offered to US clients

Chart Source: Bloomberg, FOREX.com