Over the past few years, EUR/JPY has served as sort of a barometer of risk. Now, what exactly do I mean by that?
Basically, when risk appetite is up and the markets crave higher-yielding and riskier assets (like stocks), you’ll probably find EUR/JPY joining the pack and rising up the charts. On the other hand, when markets are risk averse, it’s not unusual to see EUR/JPY on the decline.
But you don’t have to take my word for it. See for yourself! Below is a chart that shows the strongly positive correlation between the DAX (a.k.a. the German stock market) and EUR/JPY.
The same has held true for the beginning of the 2012, as the DAX and EUR/JPY moved in tandem over the first 6 months of the year.
However, it seems that this summer season, the correlation is no longer holding. Since the beginning of July, the DAX has rallied from lows around the 6,000 mark and is now just a shade below the 7,000 handle.
As for EUR/JPY, the pair has continued to slide from its highs in mid-March, falling a solid 1,500 pips to set new 12-year lows around 94.20! What gives?!
If you ask me, I think the euro zone’s problems have been too much to handle for the euro. The combination of concerns on whether or not Greece would be force to exit the euro zone and the Spanish bank bailout have weighed on the euro, causing it to sink across the board.
In contrast, one reason why German stocks may be rallying is because of Germany’s status as the “premier” economy within the euro zone. With some investors and hedge funds prohibited from investing money “high-risk” markets (i.e. emerging markets), they may be forced to park their assets in the next best choice, which would be the DAX.
Now, I’m no fortuneteller, but going forward, I think the euro zone’s weak fundamentals will probably continue to weigh on the euro and keep EUR/JPY from rising.
On the other hand though, we also have to factor in the current global economic environment, which hasn’t exactly been bright and sparkly. As a matter of fact, several of the world’s top economies are expected to ease monetary policy to enhance economic activity.
Hear me out.
The BOE has just increased its asset purchase facility, but there are already rumors going around that it may still decrease interest rates. ECB President Mario Draghi recently said that the ECB will do “whatever it takes” to preserve the euro. Meanwhile, the Fed has got a weak labor market to deal with, and if its slump continues, many believe it could push the central bank to launch QE3. And last but not least, we have the ever-present threat of a BOJ intervention!
In this old man’s opinion, a combination of these moves may ignite risk appetite, which may just be the spark needed for EUR/JPY to bust higher and cause the pair to move in accordance with the DAX.
What do you think?