Wednesday December 12, 2007 - 11:11:37 GMT
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EURJPY Correlation with the NYSE Composite
In these days of the Carry-trade unwinding, we decided to check the correlation between the EURJPY as a barometer of the "Easy leveraged money" that investors took from Japan and the NYSE Composite as a representative for a great Stock market where these same investors put their Yen based loans to work.
It is quite impressive.
Besides the obvious visual likeness of both daily charts, we decided to compute a divergence indicator by dividing the NYSE index by the Currency. We then draw a linear regression of this ratio. The result is a nice graph of scattered numbers around the line. The very low deviation of the black dots (representing the ratio) around their linear regression is showing how correlated are the two assets.
The better results are from December last year (red dotted line 1) and besides two areas (1 and 2 green areas) where there is a small disturbance, the data is quite consistent.
What all that means? First that the relationship is alive and well. Second that the latest decline in the assets where the money was invested is influencing the strength of the JPY that in turn causes more positions to be closed. This type of closed circle could be really dangerous in case it will get out of hand. Finally, because of the fact that the FOREX market is always open for business, it seems that the Currencies are predicting the trend in the leveraged markets. They wanted global markets and they got it. Now, they need to deal with the correlative results over assets classes.
Head of Technical Analysis Department
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