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Does the USD/JPY really follow stocks?
Why does the USD/JPY seem to follow stocks? There are several reasons that this is the case but two stand out to me. It is important to understand that this correlation is not as predictive in the long term as it can be in the short term. In fact, in the long term, there is a very limited correlation factor between the two markets. I bring this up today as the USD/JPY reaches exaggerated lows against the US stock open, which may lead to an adjustment in the short term. First, both stocks and short JPY positions are considered good risk-meters for global investors. There are currently a lot of short JPY positions out there. How often do you see traders equating the "carry trade" with the GBP/JPY? The JPY is cheap to borrow and can be used to fund other investments but that increases leverage and can be risky. With so many outstanding short JPY positions the market can get a little volatile anytime traders get jumpy about risk in general. Traders will want to cover those short positions and they have to do that by buying the JPY. Stocks are similar. They are higher risk assets so when the risk environment looks scary, they drop and bond prices tend to rise. Its important to realize that a falling rising JPY does not cause stocks to fall or the other way around. They are correlated only. One of the second important correlations relates to the fact that Japanese investors, including the BoJ are major liquidity providers in the global capital markets. If assets are losing value in the US, those investors may seek to exit their positions and covert their USD into JPY domestically. This happens around the globe but may add to the perceived correlation right now. Fortunately, we can do something about this information... For the rest of the article, please click this link: [url]http://www.pfxglobal.com/index.php?option=com_content&task=view&id=1215&Itemid=188[/url]
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