Backdrop:

Whether you’re an experienced trader or brand new to Forex, you should be aware of the strong positive correlation between Japanese Equities & AUD/JPY. This historical intermarket relationship is predominantly due to the fact that the Aussie is considered a “high beta/commodity” 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 not only currencies which have a higher yield, but also other asset classes (namely Japanese equities). Often we 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.

While many like to cite this relationship over the long-term, we believe watching the intraday relationship is sometimes more pertinent, especially since the new Japanese Prime Minister, Abe, has taken office. The chart below depicts AUD/JPY vs. Nikkei 225 futures from 7pm through 1pm ET today, since this is when the Nikkei futures are most liquid, and as you can see the two are nearly identical (Correlation = 0.9033). Now, this doesn’t guarantee if the Nikkei 2251 continues to correct over the coming days that AUD/JPY must trade lower as well (or vice versa), but it does suggest this should be the relationship between the two.

Thus, if you have an opinion on the direction of Japanese equity markets over the coming days/weeks or even intra-day, AUD/JPY could be a vehicle you may want to consider to express that view. Technically speaking, the Nikkei 2251 is testing the previous 2011 high around 10,890/95 but is showing signs of fatigue. That said, a potential setback could be limited to the March 2012 highs near 10,255 initially, however should equities continue to rally over the coming sessions then keep an eye on the 2010 high around 11,405/10 thereafter. As for AUD/JPY, it’s presently trading at levels not seen since 2008 and while it saw a brief setback today, many are eyeing the 96.50/60 level which sees the 78.6% retracement of the 2007-2008 decline. On the other hand, if a deeper correction ensues the next level of support may be into previous highs (over the past 3 years) located between 88 & 90.

1 Reference is for informational purposes only and is not offered to US clients

Chart Source: Bloomberg, FOREX.com